The crown prince, educated at Britain's Eton College, was heir to the throne.
The incident occurred around 10:40pm local time Friday.
Katmandu, the capital of 1.5 million, woke up yesterday to the news of the slayings. Thousands of people flocked to the royal palace in the heart of the city.
``This is unbelievable ... one day you hear that the crown prince is getting married soon and the next day he goes on to a shooting rampage and kills everyone in the family,'' said Shreeram Shrestha, who had rushed to the palace after hearing the news.
The government made no formal announcement about the deaths or new acting king until yesterday afternoon. This angered some supporters of the royal family who gathered at the palace to shout anti-government slogans.
The royal family is revered in Nepal. Some believe that the king is the reincarnation of the Hindu god, Vishnu.
The royal couple were married in February 1970. Their first child, Dipendra, was born on June 27, 1971. King Birendra was crowned to the throne on Jan. 31, 1972.
Of the nearly 22 million population in Nepal, about 90 percent are Hindu and 5 percent Buddhist. Home to the world's tallest peak, Mount Everest, Nepal is one of the world's poorest countries, with a per capita income of only US$213.
The incident comes at a time when the Himalayan state is going through major political instability. Opposition parties have been demanding Prime Minister Girija Prasad Koirala's resignation for the government's alleged role in a bribery scandal and for not quelling a growing Maoist insurgency.
RSS