President Bidhya Devi Bhandari appointed 65-year-old Oli as the country's 41st prime minister.
Oli, who is known for his pro-China stance, had served as the country's prime minister from October 11, 2015 to August 3, 2016.
The appointment was made under the article 76 of Nepal's Constitution which states that in case of no clear majority of any party in the House of Representatives, the President shall appoint as Prime Minister the member of the House of Representatives who can have the majority with the support of two or more political parties.
Earlier, former prime minister and Nepali Congress president Sher Bahadur Deuba had addressed the nation and submitted his resignation to the president.
Deuba was elected as the 40th Prime Minister on June 6 with the support from CPN (Maoist Centre) which is now a part of Left alliance and opting for merger with CPN-UML.
"The elections of three tiers of government have been successfully held under my leadership setting the foundation to long transition," Deuba said in the television address.
Oli's party CPN-UML secured 121 seats in the 275-member Parliament and became the largest party in the Parliament.
The Nepali Congress has 63 seats while the CPN-Maoist Centre has 53 seats.
The combine strength of the CPN-UML and CPN-Maoist Centre was 174, sufficient to form a majority government at the Centre.
The Madhesi parties, Rastriya Janta Party Nepal has got 17 and Federal Socialist Party Nepal has got 16 seats in the Parliamentary elections.
In 2015, when Nepal adopted a new Constitution that split it into seven states, dozens of people were killed in ethnic clashes over territory and rights.
Following the adoption of the new Constitution, the ethnic Madhesi group, mostly of Indian-origin, protested for months, saying they were not getting enough territory in one of the provinces and were also facing discrimination.
The polls were seen as a major step towards implementing the new Constitution.
He had also served as Minister of Home Affairs in 19941995. He was re-elected to the House of Representatives from Jhapa electorate in 1999.
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