Deputy Prime Minister KP Oli announced the indefinite cease-fire, a move that reciprocates the unilateral cease-fire called by the rebels last week.
The rebels declared a three-month cease-fire last Thursday, to express what they said is their commitment toward peace. The rebels, who claim to follow the teachings of the late Chinese communist leader Mao Zedong, have been fighting to overthrow the monarchy since 1996.
Formerly at odds, the Maoists and Nepal's seven mainstream political parties became loosely united last year by a common foe in King Gyanendra. The king seized control of the government last February, because he said the political parties had failed to end the insurgency with the rebels, and Nepal was in danger of becoming a failed state.
The government's decision to call a cease-fire was widely expected in Nepal, where the long-running conflict has cost more than 11,000 lives. Analysts say both sides are tired.
International Crisis Group analyst Rhoderick Chalmers says the government is drained by the conflict, which has severely disrupted Nepal's tourism industry, and the Maoists lack the military capability to capture and hold major cities or towns.
"There is no other option for the Maoists that is nearly as attractive as following through, at least for the time being, with the peace plan they have with the parties," he said. "In their heart of hearts, they would still love to have the chance to run the country entirely by themselves, but they realize that is not possible. So for them, this is probably, on the face of things, the best possible option."
The deputy prime minister also announced that the terrorism charges against the Maoists would be dropped. That opens up the possibility of the government holding direct talks with the rebels.
Nepal's parliament is meeting for the first time in four years. King Gyanendra conceded to the demands of the political parties and protesters by agreeing to restore parliament last week. The move follows a series of increasingly violent confrontations between security forces and demonstrators.
Assistant Secretary of State Richard Boucher says Washington is not ready to remove the Maoists from its list of terrorist organizations. Speaking on a visit to Nepal's capital, Kathmandu, Boucher said the rebels have to lay down their arms and fully join the peace process before removing the group from the terror list would be considered.