Prime Minister Bhattarai later met President Ram Baran Yadav to inform him of the cabinet's decision.
The swearing-in ceremony of the new head of government Chief Justice Regmi will be held on Thursday morning, according to party sources.
Earlier, ending months of political deadlock, Nepal's four major political parties reached a deal to form an election government as thorny issues were resolved during a marathon meeting.
Top leaders of the parties signed an 11-point political consensus document to form a Chief Justice-led election government. This will be endorsed by the existing cabinet after which it will be taken to the President for approval.
This will be for the first time in Nepalese political history that a sitting Chief Justice is being named as the Head of the Government, sources said.
"The political parties have reached consensus on four key issues including citizenship, voters' list, Truth and Reconciliation Commission and rank of the former Maoist combatants to be integrated into the Nepal Army after a marathon 12-hour meeting," said central member of Nepali Congress Bimalendra Nidhi.
Nidhi was present during the 12-hour marathon meeting attended by UCPN-Maoist, Nepali Congress, CPN-UML and Joint Madhesi Front.
63-year-old Chief Justice Regmi will be sworn-in as the chairman of the Council of Ministers that would conduct election to the Constituent Assembly, Nidhi told PTI.
The meeting convened at the office of the Special Committee for Army Integration, was attended by Unified CPN-Maoist chairman Prachanda, Nepali Congress president Sushil Koirala, CPN-UML chairman Jhalanath Khanal and senior Madhesi leader and Health Minister Rajendra Mahato among others.
However some 18 fringe political parties including CPN-Maoist led by Mohan Vaidya, the breakaway faction of the UCPN-Maoist, have submitted a memorandum to the President on Wednesday showing their reservation to the decision.
However, Chief Justice Regmi has sought time till November, to which the political parties were positive, he added.
The major parties have agreed to form the Truth and Reconciliation Commission for providing transitional justice at the earliest by incorporating the issues raised by the Maoists as well as the opposition parties.
With regards to the rank of the Maoist combatants being integrated into the national army, a full Colonel and two Lt Colonel posts will be given after they complete some training procedures, as per the agreement.
They have also agreed to update the voters list for the forthcoming election and tackle the citizenship issue as per the concern shown by the Madhesi parties.
Those, whose father or mother is Nepali will get citizenship by descent, as per the deal.
They have also agreed to clear all hurdles relating to conducting election and updating voters list through introducing an ordinance.
The decision to form a government led by Chief Justice will end months-long political deadlock in Nepal since the dissolution of the Constituent Assembly without drafting a constitution in May last year.
The new cabinet is likely to have eleven members, all the ex-civil servants and the Chief Justice is expected to announce the full cabinet on Thursday.
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