By Gopal Sharma

KATHMANDU (Reuters) - The sale, abduction and trafficking of children is rife in Nepal and the government should do more to encourage adoption by domestic families, a U.N. study released on Friday said.

Nepal suspended adoption of its children by foreign families last year amid criticism that the practice involved corruption and some children were being sold for thousands of dollars.

But the government cleared most of the 442 pending applications for adoption early this year after preparing a new set of rules for foreigners wanting to adopt Nepali children, officials said.

The United Nations Children's Fund (UNICEF) and a Swiss child relief agency, Terre des hommes (Tdh), said in a report only four out of every 100 adopted children were adopted by Nepali families. Many were not orphaned and were separated from their families.

"An industry has grown up around adoption in which profit rather than the best interests of the child takes the centre stage," said Gillian Mellsop, chief of UNICEF in Nepal.

"Appropriate legal safeguards and a functioning alternative care to parental care can prevent abuse and allow intercountry adoption to continue for those who need it."

Prakash Kumar Adhikary, a senior official in the Nepali Ministry of Women, Children and Social Welfare, said the Himalayan republic was trying to prepare comprehensive new laws in line with international conventions on adoption, and until then new requests from foreign families would not be considered.

"The existing rules are not comprehensive enough and we must create necessary legal and other infrastructure before accepting new requests," Adhikary said.

Joseph Aguettant, Nepal chief of Tdh, said the government should play a key role in adoption, which must not be left to the orphanages or other centres alone.

"Biological parents are often misled," he said. "Parents were led to believe that the child will return to them. But this is not the case."

Families from the United States and western Europe are increasingly turning to countries such Nepal for adoption.

Activists said hundreds of children from Nepal, among the world's poorest countries, have been adopted by foreign families in recent years.