Khanal has said his cabinet will be inclusive and he is expected to give several posts to the Maoists.
Dahal's deputy, Baburam Bhattarai, has opposed the decision to back Khanal and several leaders in Khanal's Unified Marxist-Leninist party have criticised a deal with the Maoists.
"The Maoists' calculation is that he will be more cooperative to a Maoist agenda than any other contender," says correspondent CK Lall in Kathmandu. "Instead of going round and round in a fruitless contest at the last moment they backed out and supported Khanal."
The country's civil war ended in 2006, when Maoist rebels laid down their weapons, but thousands of former Maoist soldiers are still living in camps.
A new constitution should have been completed by May last year, but it has been delayed by disagreement between parties.