The mountainous nation emerged in 2006 from a decade-long Maoist insurgency that resulted in the deaths of more than 13,000 people, displaced thousands, ravaged infrastructure and slowed development in sectors such as health and education.
The Nepal Human Development Report 2009 said the underlying causes of conflict -- such as poverty and discrimination on the basis of caste and ethnicity -- remained unresolved.
"Ineffective government, internally displaced people and frustrated combatants are some of the outcomes of conflict and these have yet to be tackled," the UN said in a statement.
"Deepening democracy and strengthening the rule of law are critical in order to give peace a chance of success," it said.
Nepal's peace process has been stalled since May when the Maoists walked out of the government over their plans to fire the country's army chief and disagreements about the future of more than 19,000 Maoist fighters housed in U.N. monitored camps.
A specially elected assembly is now preparing Nepal's first constitution after the abolition of the monarchy, part of a peace deal that proposes to restructure the state and include marginalised and underprivileged groups in the government.
When it comes to the Human Development Index, Nepal ranks lowest in south Asia with a value of 0.534 on a scale of 1, placing the Himalayan nation 142 out of 176 countries.
Life expectancy in Nepal is 63 years, while the literacy rate is 52 percent. Life expectancy for the dalits, or those at the bottom of the Hindu caste system, and other disadvantaged groups like ethnic minorities, Muslims and women was much lower.
"The message in this report is that the 'absence of war' will alone neither assure a lasting peace nor deliver prosperity," said Robert Piper, UN resident representative in Nepal.
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