Nepali police fired tear gas and water cannon and arrested 77 demonstrators in the capital Kathmandu as several hundred people protested against a $500-million US grant, authorities said.

"The protestors were arrested after they pelted stones and tried to push into the restricted area (near parliament)," police spokesman Bishnu Kumar KC told AFP.

Nepal signed the Millenium Challenge Corporation (MCC) pact in 2017 to fund infrastructure projects but the government is struggling to get parliament to ratify it by a February 28 deadline.

Major opposition comes from Prime Minister Sher Bahadur Deuba's own coalition partners including Maoist politicians -- seen as traditionally close to China -- who say it undermines Nepal's sovereignty.

Local media has reported that Chinese officials have lobbied Nepali politicians about their concerns, seeing the grant as a covert US push to increase Washington's influence.

Hundreds of people protested on the streets of Kathmandu
Hundreds of people protested on the streets of Kathmandu AFP / PRAKASH MATHEMA

Indian daily the Hindustan Times reported on Tuesday that Washington believes that China is behind a disinformation campaign against the pact.

"Should outside influence and corruption cause parliament not to ratify, it would be deeply concerning for the US, and a loss for the people of Nepal," the paper quoted a US State Department spokesperson as saying.

Prakash Sharan Mahat, spokesperson of the ruling Nepali Congress party said that backtracking from the commitment will only erode Nepal's credibility.

"This grant is expected to help spur the economic growth in Nepal... We will continue to hold dialogue with other coalition partners as well as other political parties to mobilise their support to present the MCC Compact in the next session of the parliament," he said.

The Millennium Challenge, created by the US Congress in 2004, offers large-scale grants to support economic growth and reduce poverty, according to Washington.