(Adds Maoist quotes, analysis)

By Krittivas Mukherjee

KATHMANDU, May 2 (Reuters) - The U.S. ambassador to Nepal has met the country's Maoist former rebel chief, the first official meeting of a senior American official with a group that Washington still labels terrorists.

A U.S. embassy statement issued on Friday said Ambassador Nancy Powell met Pushpa Kamal Dahal, known by his nom de guerre Prachanda, on Thursday to discuss the outcome of the April 10 election in which the Maoists emerged as the largest party.

The victory of the Maoists, who gave up an armed revolt in 2006 with a peace deal that ended a decade-long civil war, put the United States in a tight spot as it would now have to do business with the party likely to form the new government.

The Maoists have abandoned many of their leftist policies, such as nationalisation, to embrace foreign investment and public-private partnerships. Their victory could lead to a focus on improving living conditions in South Asia's poorest country. The statement said the two also discussed the Maoist party's plans for the Constituent Assembly, which will write Nepal's new constitution, and the future of U.S.-Nepal relations.

"The meeting occurred in advance of Powell's return to the United States for consultations on U.S.-Nepal relations," it said.

"Powell provided an overview of current U.S. government assistance to Nepal designed to help create a more prosperous, democratic and stable Nepal."

A Maoist politburo member told Reuters the meeting was an indication Washington wanted to mend fences now that they had won the election.

"All the signals are positive that they will remove the terrorist tag on us soon," Dinanath Sharma said. "How can they not recognise the fact that we won a free and fair election?"

Analysts too agree the United States had moved to break the ice with the former rebels.

"It is the beginning of the U.S. recognition of the Maoists as a democratic force," said Yubnath Lamsal, the chief editor of the Rising Nepal daily.

Powell sought assurances that the new government would respect donor agreements and ensure the safety of those implementing them.

The envoy urged the Maoists to show their commitment to the political process through their words and actions.

The Maoists say they are committed to the peace process but cannot yet renounce violence completely, a stance that analysts say is more aimed at browbeating political opponents than a real threat. (Editing by Simon Denyer and Alex Richardson)

AlertNet news is provided by