The decision was made by the new Cabinet that was installed last week after the king yielded power on April 24 and restored democracy in the face of mass protests.
Home Minister Krishna Sitaula announced that the ambassadors to the United States, India, Japan, Britain, France and other countries were being recalled.
The government has said it will dismantle legislation, appointments, decrees and other actions taken after the king grabbed power in February 2005. It earlier scrapped municipal elections that were held three months ago.
Parliament also has committed to elections for a constituent assembly that will rewrite the Constitution. That was a key demand by Maoist rebels who joined forces with a seven-party alliance to play a key role in the three weeks of often-bloody demonstrations.
But while the rebels appear to be headed for a role in the political mainstream and have agreed to hold peace talks with the government, their impatience for quick action is mirroring the general public's sentiments.
A news report Sunday quoted the rebels' leader, Prachanda, as saying an interim constitution should be enacted immediately, even before the special assembly is elected.
"There should be an interim constitution and an interim government," Prachanda was quoted as saying by Nepal magazine.
The parties in the government and the rebels both agree there should be elections for a constituent assembly that would rewrite the constitution, but appear to have differences in how to do it.
The rebels want an interim constitution immediately, but the alliance is happy to just make minor changes in the existing charter until a new one is written by the constituent assembly.
"We have not made any official decision on the issue but we are in agreement that it would be fine just to remove some clauses from the existing constitution," said Gopal Man Singh, minister for physical planning and works.
The rebels, who have waged a decade-long insurgency that has killed 13,000 people, have made it clear they have differences with the new government despite their partnership in bringing down the royal regime.
"There are some differences in the process between the seven-party alliance and us which should have been resolved through dialogue," Prachanda said. "Instead of resolving the differences, the parties opted for the reinstatement of parliament. We have strong objections over this."
The death toll from the recent protests rose to 19, officials said Sunday.
The Nepali Congress party said one of its members died late Saturday at Medicare Hospital from injuries suffered when hit by a tear gas shell in Katmandu on April 22.
The Communist Party of Nepal said of its activists also died late Saturday from complications from being hit by a tear gas canister on April 17. He had been hospitalized since April 26.