Speaking at the Indian Council of World Affairs (ICWA), he also said that the Nov 9 constituent assembly election in Nepal would be the "second and last" such poll process aimed at drafting the country's constitution.
If the endeavour did not succeed, the country should hold a referendum, he added.
Nepal advocated back channel talks between political parties to get over their differences over the issue, "so that we can come to an understanding before the polls".
The "question of restoration of monarchy is impossible and the people will not let it happen... Democratic awareness is very deep among the people."
Nepal and another former prime minister, Baburam Bhattarai, have publicly objected to former king Gyanendra Shah's visits to different parts of the country, saying he was trying to disrupt the constituent assembly polls.
Nepal said the constituent assembly polls, the second since 2008, would throw up a fractured mandate.
"We have to work with one another in an atmosphere of give and take. Or (if the effort fails), the issue should be put before the people through referendum ... a plebiscite to decide which is the best idea" to go ahead.
Nepal said the constituent assembly was a very inclusive form of representation of the people, with seats reserved for women and the Dalits and Madhesis.
He also warned that if the constituent assembly "failed to fulfil its assigned task of drafting a new constitution, it will lead to instability and the country will slip into further difficulty".
To a question on referendum, Nepal said he and his party, the Communist Party of Nepal-Unified Marxist Leninist, FELT that the second constituent assembly "should be the second and last one for the process of drafting the constitution...
"We should not think of a third one, we cannot have a fourth, fifth one."
He said there were three options of governance - executive presidency, parliamentary system and the direct election of the prime minister, which his party favours.
Nepal, who met Prime Minister Manmohan Singh during this visit, voiced confidence that his party would emerge with the largest vote share.
He said India and Nepal relations were marked by "warmth, friendship, goodwill and cooperation".
Earlier, ICWA director general Rajiv Bhatia said Nepal was chosen "as a very timely and important theme for the seventh lecture".
He said the former Nepalese prime minister played a key role as leader of the seven party alliance in helping in Nepal's transition to a republic.
Former Indian ambassador to Nepal Deb Mukharji described Madhav Kumar Nepal as among the "giants of Nepali politics".