At least 27 people are feared to have been killed in an overnight gun battle between security forces and Nepal's communist guerrillas over a key highway in midwestern Nepal.

The violence erupted Sunday in Pili in Kalikot district where the Royal Nepalese Army is engaged in constructing a 221km highway on a war footing.

A statement issued by the military leader of the rebels, who gave his name only as Prabhakar, said 26 guerrillas had died in the attack.

While the underground rebel leader claimed 159 soldiers had died in the battle, the army refuted it as propaganda and, till Tuesday morning, confirmed the death of a single soldier.

Brigadier General Dipak Gurung, spokesman of the Royal Nepalese Army, said 82 of the missing soldiers had contacted them.

The Surkhet-Jumla Highway will link the Karnali region in the remote north, the most backward region in the kingdom, to the rest of the country.

In February, when King Gyanendra sacked the government of prime minister Sher Bahadur Deuba and assumed direct rule, the first meeting of the new council of ministers decided to give priority to the development of the Karnali region and the highway.

Surrounded by districts regarded as strongholds of the Maoist insurgents, the highway has run into trouble frequently.

About two years ago, the Chinese construction company that had won the bid to build the highway, pulled out of the project, citing insecurity created by the guerrillas.

Since then, the army has been put on the job, with the mandate of completing the road by February 2006.

Since the job involves blasting rocks and the use of explosives, an army camp was set up in Pili to provide security to the workers.

Hundreds of guerrillas attacked the camp Sunday, continuing the battle till Monday, resulting in disruption of the work and possibly heavy casualties.

Further details were not available immediately due to the remoteness of the region, Gurung said.

The region hit the headlines in May this year after four international donors - the German Development Agency, Britain's Department for International Development, the Dutch Cooperation Agency and the UN World Food Programme - suspended a poverty alleviation project in Kalikot to protest against the assault of a woman worker by the rebels.