KATHMANDU (Reuters) - India is walking a diplomatic tightrope as Nepal tries to form a new government, aware that excessive meddling in its traditional "backyard" could risk pushing the fragile Himalayan democracy closer to China.
India has always seen Nepal as part of its strategic sphere of influence, but that has been challenged in the past year since the election of Maoist Prime Minister Prachanda, who before he resigned last week had edged closer to Beijing.
Former guerrilla leader Prachanda quit on Monday after his dismissal of the army chief was blocked, sparking a political crisis and dealing a blow to Nepal's peace process after a decade-long civil war that saw the Maoists lay down their arms.
Prachanda blamed "external forces" for his downfall, a likely reference to India and a sign of a growing backlash against its bigger and more powerful neighbour.
As Nepal's parties bicker over a new government, China could back the Maoists to keep their influence.
India, aware the former rebels are still the main political force with 40 percent of seats in parliament, could look for a counterweight to any pro-China tilt in a ruling coalition.
"India has to do business with the Maoists, so they will have to do a nice balancing act -- not anger the Maoists while backing the forces it thinks are favourable to it," said Lok Raj Baral, head of the Nepal Centre for Strategic Studies think tank.
"The Maoists know anti-India rhetoric now has quite a bit of appeal among the Nepali people. If India is perceived by the Maoists as too intruding it could push them more towards China."
A "GREAT GAME"
Landlocked Nepal depends on India for trade and crucial supplies of food and fuel, the two nations share a Hindu culture and many Nepalis cross over the border to work in India.
Trade and travel links across the Himalayas that divide Nepal and China are, by contrast, much weaker.
But now India and China are playing their own "Great Game" in South Asia. Many in India fear a slow encirclement by Beijing, which has used its economic clout to win influence across the region, from building a port in Sri Lanka to selling arms to Pakistan.
India denies meddling in Nepal but it was criticised in its own media for backing army chief General Rookmangud Katawal against Prachanda in an attempt to keep its influence there.
New Delhi also has had ties with Nepal's former monarchy and the opposition Nepali Congress party, even though it helped the Maoists join the political mainstream and brokered a 2006 peace deal.
"As usual, India interfered," said Maoist party foreign department head Chandra Prakash Gajurel, adding that the Indian ambassador to Nepal met Prachanda several times to ask him not to fire the army chief. "We are not sure what India's agenda is."
That agenda may be warding off China. Some analysts say Beijing has encouraged a nationalist front to counter India.
Those fears gained ground in New Delhi after Prachanda travelled to China last year for the Olympics closing ceremony, departing from a tradition which has seen incoming Nepali leaders make New Delhi their first foreign port of call.
India has also nervously watched China's rapid inroads into Nepal with plans of a rail service from Lhasa to the Nepal border. A dozen high-level Chinese delegations, including two military teams, have visited Nepal since last year.
"The increasing level of bilateral engagement also indicates that China is wooing Nepal as a new strategic partner," Nihar Nayak wrote in a recent paper for the New Delhi-based Institute for Defence Studies and Analyses.
Chinese interest in Nepal mainly centres on containing pro-Tibet politics. The battle is also for control of key passes in the Himalayas used by Tibetan separatists to go to India.
India and China fought a border war in 1962, but there is little possibility of an India-China proxy war in Nepal.
"I think there's a long-standing agreement that the south of the Himalayas is India's sphere of influence," said Kunda Dixit, editor of the Nepali Times weekly. "As long as Nepal is not the springboard for Tibetan protests, China should be okay. It looks at Nepal through the Tibet prism."
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