A European Union delegation on a visit to Nepal says the country is in danger of political collapse.
Nepal has seen many political protests in recent months
EU delegation leader, Tom Phillips, said the failure of constitutional forces could lead to a breakdown of government institutions.
King Gyanendra seized direct power in February saying politicians had failed to tackle the insurgency by Maoists.
The EU team also accused the Maoists of continuing to recruit child soldiers despite calling a ceasefire last month.
Mr Phillips, who is also director for South Asia and Afghanistan at Britain's Foreign and Commonwealth Office, was speaking at a news conference in Kathmandu at the end of a three-day visit.
He urged the Nepalese government to reach out to the political parties to develop a full return to multiparty democracy.
Mr Phillips said the king's takeover of power had darkened prospects for a resolution of the armed conflict and the political crisis.
He called King Gyanendra's move self-defeating.
The BBC's Charles Haviland in Kathmandu says the EU is an important donor to Nepal and this visit by the diplomatic mission reflects its continuing concern at the violence and political stalemate.
Mr Phillips said the government and security forces must combat what they called the "culture of impunity" on human rights violations.
But he told Maoist rebels the EU absolutely rejected the use of violence and did not see Maoist ideology as the answer to Nepal's problems.
Mr Phillips said the rebels' unilateral truce appeared to be tactical - they were still extorting, intimidating people and signing up children to fight.
However, he urged the government to respond to the ceasefire whatever its misgivings.
Nearly 12,000 people have been killed in the nine-year Maoist insurgency that aims to replace country's monarchy with a communist republic.