AT A carpet factory in Nepal's chaotic capital, Tibet, a weaver guides the yarn through the loom, her sweater lifted discreetly so her six-month-old baby can nurse as she works. Children are part of the scenery in this small redbrick cottage, where a dozen women work four looms, meticulously weaving, then tapping the threads with a hammer to tighten the weave.

Khamsum Wangdu, 45, a Tibetan, has become used to the idea that his carpet factory is starting to look more like a day-care service. Right now he has bigger concerns.

"What can I do? For Tibetans in Nepal, life is getting harder. These families are barely getting by on the work I can give them. Some can't afford school for their children, and some are even putting their children to work for extra money," said Wangdu, surveying a lumber yard on two acres of land he was forced to sell to keep his last carpet factory running.

In Nepal, hundreds of small factories like these make up a $60 million-a-year industry that has become a lifeline for tens of thousands of Tibetan refugees, many of them fleeing alleged violence by Chinese authorities.

For decades, Tibetan exiles found a relatively safe haven in Nepal under the country's Hindu monarchy. An estimated 20,000 Tibetans live in this Himalayan nation sandwiched between China and India, which has centuries-old cultural links to Tibet.

But with the overthrow of King Gyanendra in a Maoist-led revolt last year, Tibetans in Nepal lost their best hope for a powerful ally. Nepal's foray into democratic rule has been sketchy, with a constitution yet to be finalised and a parliament dominated by Maoists who - for now - have put down their weapons and pledged co-operation with pro-democracy parties.

In the turmoil, China's influence in Nepal is growing. In his first official foreign visit as Nepal's prime minister, Prachanda, a Maoist, jetted to Beijing, not Delhi - a clear sign to many political experts that the Chinese government was wooing him. Shortly after taking office, Prachanda reaffirmed that the Dalai Lama's Nepal headquarters would remain closed.

Nepalese authorities appear to be caving to pressure from Beijing to crack down on Tibetan exiles, many of whom are now experiencing more harassment, more ID checks and frisking by police, and more difficulty getting into schools and finding jobs, according to an International Campaign for Tibet report released last week.

Kate Saunders, a director at the International Campaign for Tibet, said: "China's efforts to influence the Nepalese government and civil society seem to be working.

"Nepal has adopted a harder line against its Tibetan community. That's a big shift from the humanitarian approach that has characterised Nepal's treatment of Tibetans. As a result, Tibetans are increasingly fearful, demoralised and at risk."

The livelihood of exiled Tibetans is under threat, Saunders says. Many Tibetans in Nepal are going out of business, a trend hastened by a global economic slowdown that has put the brakes on export orders and reduced the number of tourists who come here to buy carpets and other handicrafts. More than 500 factories have closed, most in the past year, say analysts.

More and more Tibetans are finding themselves in a legal limbo as Nepalese authorities refuse to grant them their yearly refugee certificates that give them residency status - and the civil rights protections that go with it.

Tibetan business leaders and human rights groups accuse Maoist militias and Nepalese police of harassing Tibetans and collecting extortionate "taxes" from Tibetan factory owners such as Wangdu and their workers.

Wangdu was once one of Kathmandu's largest carpet makers, employing about 600 people in four large factories. Now he is down to one factory and a workforce of less than a hundred.

In some cases, Nepalese-owned businesses have risen to take their place. Nepalese carpet manufacturers now supply many of the shops in Kathmandu, the hub of Nepal's carpet industry.

Tinley Gatso, a Buddhist monk who is also a business leader for Nepal's Tibetan community, said: "We survived on our culture and our crafts. That was our milk. And it was our gift to Nepal. The Tibetan carpet industry is one of this country's biggest sources of foreign revenue.

"Now our factories are shutting and our people have no place else to go."