While the Thakuris were ruling central Nepal, yet another Hindu clan, the Khasas , were migrating up from the plains and carving out a small fiefdom in western Tibet. In the early twelfth century a Khasa king, Nagaraja, moved his capital down to Sinja in the Karnali basin and established a powerful dynasty which at its height controlled a broad sector of the Himalaya from Kashmir to present-day Pokhara. The history of the Khasas is little understood, for they left few written records and only minor ruins at Sinja (now Hatsinja) and Dullu, south of Jumla.

Nepal entered a new and much better documented period of its history when the Thakuri king of Bhaktapur, Arideva, took the title Malla , probably in the year 1200. Malla was, in fact, a popular form of royal address in India at the time - the Khasa kings also called themselves Mallas - but the name has come to be associated with at least three separate dynasties, lasting more than five centuries, that presided over the renaissance of Nepali culture during which most of the temples and palaces still on display in the Kathmandu Valley were built.

The early Malla era was marked by great instability: the Khasas mounted several raids on the valley, although they were never able to gain a ruling foothold, and in 1349 Muslims swept up from Bengal and pillaged both Hindu and Buddhist holy sites in a brief spree of destruction and violence. Despite these disruptions, trade flourished, many of the valley's smaller cities were founded, and Arniko, the great Nepali architect, was dispatched to the Ming court to instruct the Chinese in the art of building pagodas. Jayasthiti Malla (1354-95) inaugurated a period of strong central rule from Bhaktapur, but his most lasting contribution was to dragoon his Buddhist subjects into the Hindu hierarchy by dividing them into 64 occupational castes - a system which remained enshrined in Nepali law until 1964. Malla power reached its zenith under Yaksha Malla (1428-82), who extended his domain westwards to Gorkha and eastwards as far as present-day Biratnagar. Upon his death, the kingdom was divided among three sons, and for nearly three centuries the independent city states of Kathmandu, Patan and Bhaktapur (and occasionally others) feuded over lucrative trade arrangements with Tibet. Judging by the opulent durbars built during this period, there must have been enough to go around, and the intense rivalry seems to have been good for both art and business.

The Khasa kings didn't fare so well, and by the late fourteenth century their empire had fragmented into a collection of petty provinces. The Muslim conquest of north India during the early part of the century figured indirectly in Khasa's downfall: a steady stream of princes from Rajasthan, which had borne the brunt of the invasion, limped into the Khasa hills in search of consolation prizes, and rapidly wheedled their way into positions of power. Those who took the reins of the Khasa provinces came to be known as the Baaisi Raja (Twenty-two Princes), while others who subjugated Magar and Gurung states to the east became the Chaubisi (Twenty-four).