Participants of the rally led by the Dalai Lama's representative in Nepal, Thinley Gyatso, marched through the Bouddha area on the eastern outskirts of Kathmandu and then listened to message of their spiritual leader, the Dalai Lama, read out by Gyatso.

Police allowed the Tibetans to participate in the peaceful rally but made five arrests.

"We arrested four Tibetans and one female foreigner for wearing 'Free Tibet' T-shirts," said Deputy Superintendent of Police Govinda Ram Pariyar, who is Bouddha's police chief.

The nationality and name of the arrested foreigner was not immediately known.

Pariyar added that the police would not intervene in gatherings by the Tibetans as long as they do not engage in activities that are directed against China.

Nepal on Monday banned demonstrations and gatherings around the Chinese Embassy and visa office, apart from Chinese business installations, fearing the Tibetans could target them. On Sunday, Gyatso was summoned by the government and warned that activities directed against China would be dealt with harshly.

Internal Affairs Ministry spokesman Jai Kukunda Khanal said the police have been given strict orders to arrest Tibetans who make attempts to break security cordons around Chinese diplomatic and business installations. Those arrested would be tried according to Nepal's laws, he added.

About 1,000 security personnel have been deployed to guard the installations.

Local media reports said the police also raided the Bouddha area Tuesday night and arrested two Tibetans whom they believed could lead demonstrations around Chinese diplomatic offices. The Bouddha area is home to hundreds of Tibetan families.

Nepal, which is home to over 20,000 recognized Tibetan refugees and thousands of illegal Tibetan immigrants, has faced increasing pressure from China since March 2008 to contain anti-China activities by Tibetans.

Nepal receives substantial development aid from China and officially considers Tibet as an inalienable part of China.