KATHMANDU (Reuters) - Apart from a small bust of Chairman Mao beside his armchair, Nepali Prime Minister Baburam Bhattarai flaunts no trappings of his revolutionary past: these days he talks of foreign investment, infrastructure projects and double-digit growth.

The trouble is that, since they handed over their guns at the end of a decade-long insurrection in 2006, Nepal's Maoists have done no better at running the Himalayan republic than the corrupt and incompetent political mainstream they joined.

Liberated from civil war and sandwiched between economic powerhouses China and India, Nepal could be one of Asia's success stories. Instead, as it blunders further into political turmoil, even its own leaders talk darkly of a "failed state".

Last May, its quarrelsome political parties missed a deadline to write a new constitution. As a result, Bhattarai's rivals say his government has no legal status, the country has no parliament, and there is now no agreement on a date for elections to end the stalemate.

"Unfortunately the old parliamentary parties are trying to get their pound of flesh, not agreeing ... on anything until they get the leadership of the government," Bhattarai told Reuters in an interview in his leafy official compound in the capital, Kathmandu, last week.

Most pressing, due to an impasse over this year's budget, the caretaker government's authority to draw from the Treasury will lapse this Thursday, which means it will be unable to pay the salaries of half a million civil servants, soldiers and police.

"We won't be able to supply even essential drugs to the sick in hospitals, pay old-age pensions and feed inmates in jails beyond that day," bemoans Shanta Raj Subedi, the most senior bureaucrat at the Finance Ministry.

Economists warn that development projects will grind to a halt in a country where one quarter of the 26.6 million population live below the poverty line, the economy will shrink and black markets, money-laundering and smuggling will flourish.

"It will be ... an economy in anarchy," said Chiranjibi Nepal, who teaches economics at Kathmandu University.

"CORRUPT AND FECKLESS"

For some, the political limbo in Kathmandu has become so familiar it hardly amounts to a crisis.

"There is no parliament, no budget and no constitution, and yet the country moves on," said Kunda Dixit, editor of the Nepali Times. "All the parties are so corrupt and so feckless that not having a government is actually beneficial because there is no one to make all those mistakes."

However, the Maoists' rivals are running out of patience.

Bhattarai's predecessor, Jhala Nath Khanal of the anachronistically named Unified Marxist-Leninist communist party, says that unless Bhattarai steps down and forms a "unity" government his group will continue to block the passage of a new budget and may call for a popular uprising to topple him.

Thousands of protesters shouting "You can't impose totalitarianism!" and "Set up a consensus government!" marched through the streets of temple-studded Kathmandu last Friday, cranking up pressure on Bhattarai to quit.

But the Maoist leader remained serene and defiant.

"I am the only legal prime minister," Bhattarai said. "They are not ready to face the next elections, they fear they will be routed in the elections - that's why they want the leadership of the government," he said of opposition parties.

He said that if the opposition continued to block the budget, he would seek a presidential decree to push it through.

However, Bhattarai conceded that President Ram Baran Yadav - who is supposed to stand above the political fray, but is a member of the centrist Nepali Congress Party - was hardly an ally, and indeed there have been rumours that the president may try to end the crisis by grabbing executive power himself.

GATHERING CLOUDS

A dapper figure in a brown turtle-neck top under a Western-style jacket, it is hard to picture the 58-year-old Bhattarai as one of the leaders in the Maoists' guerrilla struggle against government troops between 1996 and 2006, which took the lives of some 16,000 people.

The Maoists joined a peace process in 2006, and emerged from elections two years later as the largest group in a constituent assembly that voted to abolish Nepal's centuries-old monarchy.

Bhattarai succeeded in retiring thousands of Maoist fighters and integrating hundreds into the national army, removing a serious threat to peace. However, demands for the country to be divided into states along ethnic lines derailed his efforts to establish a new constitution and end the political instability.

Dixit, the Nepali Times editor, said that, despite their titles, none of the country's parties are ideologically communist any more and, decrying the entrenched corruption, joked that "political power no longer comes from the barrel of a gun - it comes from their wallets".

He said one of the biggest threats to Nepal was the breakdown of development in the provinces, where there have been no local elections for 12 years and public funds are plundered by corrupt officials.

Other clouds are gathering as politicians feud in Kathmandu.

A hard core of Maoists disillusioned with the party's shift away from the radical left and failure to deliver land reforms, have broken away. This rump group is now threatening to go back to war but, even if they don't resort to violence, they could lose the Maoists' votes when elections are eventually held.

Finally, demands for ethnic autonomy are growing across the country, particularly in the southern plains.

"The country could go towards a new confrontation," warned opposition leader Khunal. "There might be a mass movement, and what could happen then nobody can tell."

(Editing by Robert Birsel)

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