Nepal's embattled prime minister, KP Sharma Oli, will not resign but let parliament decide his fate instead, an aide has said, a day after the Supreme Court rejected his decision to dissolve the legislature and call early elections.

"The prime minister will not resign now. There is no question about that," Surya Thapa, the aide, told Reuters on Wednesday.

The Himalayan nation has been in political turmoil since December, when Oli suddenly dissolved parliament and announced the elections, citing a lack of cooperation on key policy issues by leaders of a rival faction of his ruling party.

Oli, 69, has begun meeting allies in the Nepal Communist Party (NCP) to review the situation after the court held parliament's abrupt dissolution unconstitutional and ordered it to be called into session before March 8.

"He will face parliament," Thapa added, but did not elaborate.

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Celebrations on reinstatement of parliament

Thousands of people opposing Oli waved red and white flags bearing the communist hammer and sickle as they took to the streets in the capital, Kathmandu, for a rally to celebrate the court decision and press the prime minister to resign.

"Oli should pack up his bags and go to Balkot," said 25-year-old Purna Khadka, a protester whose face was painted in the colours of the party flag, referring to the site of the prime minister's home.

Members of the anti-Oli faction said they rejected his autocratic style of functioning and the latest court order proved his inability to govern.

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'Political flux reaches a climax'

Lawmakers opposed to the prime minister are holding talks to decide their next move, said Narayan Kaji Shrestha, a senior NCP leader who organised nationwide protests against Oli in the past few months.

Analysts said a power struggle was imminent among Nepal's Communist leaders and uncertainty could last for weeks.

"The political flux will finally reach a climax with a change of prime minister," said Krishna Pokharel, a professor of political science at Kathmandu's Tribhuvan University.

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