"There is no meaning of giving continuity to my government if it failed to make concrete progress in the peace process," the Prime Minister told a select group of journalists in the capital.
Khanal, who was elected the Prime Minister on February 3 after 17 rounds of elections in Parliament, said that he would quit if the major works related to the 2006 landmark peace process were not completed by August 13.
"It will be my political and moral duty to quit the government if I fail to prepare an environment of trust to accomplish the fundamental tasks on the peace process," he underlined.
"My exit will be to allow for reconsideration of the political alliance, taking new initiative for the implementation of the five point deal and opening of the outlet to the existing deadlock."
Khanal announcement yesterday to quit came hours after he inducted new ministers into his cabinet amid an ultimatum from the Maoists, his main ally, to pull out of the government if he failed to reshuffle the six-month old ministry within 24-hours.
Ten ministers, including nine from the UCPN-Maoist party, the largest party in the coalition, were sworn in amid a power struggled in the Maoist party.
The withdrawal of Maoists support would have led to the collapse of Khanal's administration.