The polls would now be held on June 23 instead of June 14, Energy Minister Janardan Sharma said.
Minister of Information and Communications and government's spokesperson Surendra Kumar Karki said the decision was taken also considering Ramzan.
The proposal would be tabled at the Parliament for discussions, he said.
The announcement came after a cabinet meeting of top leaders of three major parties and agitating Rastriya Janata Party Nepal (RJP-N) in caretaker Prime Minister Prachanda's residence in Baluwatar, Kathmandu Post reported.
On May 26, the newly-formed alliance of six Madhes-based parties -- the Sanghiya Gathabandhan led by RJP-N -- announced that it will boycott the second phase of local elections and launch a fresh agitation to block the first local-level polls held in the country in two decades.
Prachanda had proposed to postpone the date to ensure the participation of RJP-N as the alliance was pressing the government to defer the date.
The final phase would now be held on June 23, when the restive southern Terai region which is home to the ethnic Madhesi population, will head to the ballot box.
The first phase of the local polls was held on May 14 with a 71 per cent voter turnout.
It was a major step in Nepal's difficult transition to democracy as local polls could not be held in the country after 1997 largely as a result of the decade-long Maoist insurgency that claimed more than 16,000 lives in Nepal.
Local bodies remained ignored during the long transitional period even after the signing of a peace deal between the government and the Maoists in November 2006.
Political parties representing Madhesi people had been opposing the polls until the Constitution is amended to address their key demands. They seek more political representation in the parliament and redrawing of provincial boundaries.
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