Major political parties were engaged in hectic parleys and strategy sessions but finding a way out of the deadlock before the deadline appeared a near impossibility unless last-minute dramatic changes in the position of parties involved.
The political crisis was sparked by Maoist premier Prachanda's resignation after Yadav blocked his move to sack army chief General Rukmangad Katawal.
Three ethnic Indian Madhesi parties, with a combined strength of 83 seats in Parliament, hold the key to breaking the political logjam as any combine sans the Maoists will need their support to attain the majority of 301 in the 601-member Constituent Assembly.
The Maoists were hesitating to support a government led by former ally Communist Party of Nepal-Unified Marxist Leninist and were not ready to join the new government under any other party's leadership. Nepali Congress, the second largest party in Parliament, has said it will back a CPN-UML candidate for the post of prime minister.
"Our priority will be to set up the new government including all the major political parties," CPN-UML general secretary Iswor Pokhrel said.
"However, it is unlikely we will reach agreement by Saturday."
The UML central committee held a crucial meeting to discuss the government formation. Party Chairman and prime ministerial front-runner Jhalanath Khanal told the meeting that UML should go for a government which includes Maoists.
However, senior leader K P Sharma Oli is firmly opposed to any truck with the Maoists, media reports said here. Media also reported that there are divisions among the leadership over the PM candidate with some of them supporting senior leader Madav Kumar Nepal and some going for Khanal.
NC Vice-President Ramchandra Poudyal said it is upto the UML to decide whether they choose Madhav Nepal or Khanal. The Madeshi front -- made up of Madhesi People's Rights Forum (53 seats) Terai Madhes Democratic Party (21) and the Sadbhavana Party (9) -- said it will support any party that is prepared to form a unity government but is yet to come out with a stand in case there no national consensus.
As uncertainty deepened, India [ Images ]n envoy Rakesh Sood met Prachanda and discussed the political situation. During the meet, sources said, the Maoist chief expressed his party's commitment to the peace process and multi-party democracy. This was the first meeting between Sood and Prachanda after he indirectly accused India of interfering in Nepal's internal affairs while announcing his resignation. Prachanda also held a meeting with head of the UN Mission in Nepal, Karin Landgren, while US ambassador Nancy J Powell met Nepali Congress President G P Koirala.