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The landslide created a mud dam blocking the Sunkoshi river near Jure in the Sindhupalchowk district, about 60km northeast of Kathmandu, heightening fears of downstream floods that could reach as far as Bihar in eastern India.
Nepal's army spokesman, Jagadish Pokharel, said efforts were being made to break down the dam to avoid floods.
Officials said eight bodies have been recovered so far from the debris of collapsed houses.
Witnesses said mud and rocks came crashing down, blocking the river and creating a 3 km-long artificial lake that has inundated part of the Arniko highway that connects Kathmandu with Tibet.
Residents in downstream villages have been asked to evacuate as the mud dam could collapse at any time, a police officer said.
"The landslide has caused huge damage. We cannot make any estimates of the number of deaths now. We are looking for other people who might be trapped," another police officer, Bharat Bahadur Bohara, told Reuters from the site.
Steep hills and heavy rains are making search and rescue operations difficult, home ministry officials said.
Monsoon rains that start in mid-June and continue through September are crucial for farm-dependent Nepal, one of the 10 poorest countries in the world. But scores of people die every year in landslides and floods caused by heavy downpours.
Heavy rains in June last year caused rivers and lakes to burst their banks, inundating towns and villages and killing thousands in the neighbouring Indian state of Uttarakhand and dozens in the border district of Darchula in west Nepal.