Witnessing severe poverty amongst Nepalis since his youth, Prachanda was drawn to left-wing political parties. He joined the underground Communist Party of Nepal (Fourth Convention) in 1981. He became general secretary (party leader) of the Communist Party of Nepal (Mashal) in 1989. After several iterations, this party became the Communist Party of Nepal (Maoist). Prachanda lived in secret, even after the restoration of democracy in 1990. A little-known figure until then, he controlled the clandestine wing of the party, while Baburam Bhattarai represented the United People's Front in parliament. A biography written by Anirban Roy, the ex-Nepal correspondent of the Hindustan Times, covers Prachanda's twenty-five years living underground and has been translated into Nepali as Prachanda: Ek Agyat Bidhrohi. Anirban Roy's book is also getting translated into Hindi and Assamese. Since 1996, Prachanda has been internationally known as the leader of the CPN(M), presiding over its military and political wings.

On 4 February 1996, Bhattarai gave the government, led by Nepali Congress Prime Minister Sher Bahadur Deuba, a list of 40 demands, threatening civil war if they were not met. The demands related to "nationalism, democracy, and livelihood" and included such line items as the "domination of foreign capital in Nepali industries, Business and Finance should be stopped", and "discriminatory treaties, including the 1950 Nepal-India Treaty, should be abrogated" (referring here to the 1950 Indo-Nepal Treaty of Peace and Friendship), and "land under the control of the feudal system should be confiscated and distributed to the landless and the homeless." After that, and until 26 April 2006, Prachanda directed the military efforts of the CPN(M) towards establishing areas of control, particularly in the mountainous regions and in western Nepal.

In late 2004 or early 2005, relations between Prachanda and Baburam Bhattarai soured. This was reportedly due to disagreement on power sharing inside the party. Bhattarai was unhappy with the consolidation of power under Prachanda. At one point, Prachanda expelled Bhattarai from the party, though he was later reinstated. They later reconciled at least some of their differences.

On 22 November 2005, Prachanda and the Seven Party Alliance released a 'twelve-point agreement' that expressed areas of agreement between the CPN(M) and the parties that had won a large majority in the last parliamentary election in 1999. Among other points, this document stated that the dictatorial monarchy of King Gyanendra was the chief impediment to progress in Nepal. It claimed further that the Maoists were committed to human rights and press freedoms and a multi-party system of government. It pledged self-criticism and the intention of the Maoists and the Seven Parties to not repeat past mistakes.

Prachanda met for talks with Prime Minister Girija Prasad Koirala on 16 June 2006, which was thought to be his first visit to the capital Kathmandu in more than a decade. This meeting resulted in the Comprehensive Peace Accord to dissolve parliament, incorporate the CPN(M) into a new interim government, draft a new constitution, and disband the CPN(M)'s "people's governments" operating in rural Nepal. The two sides also agreed to disarm at a later date, under international supervision. On 18 September 2007, the CPN(M) left the coalition government ahead of the Constituent Assembly election, demanding the declaration of a republic by parliament, and a system of proportional representation in the election. The CPN(M) rejoined the government on 30 December 2007 after an agreement to abolish the monarchy following the election, and to have a system of partial proportional representation in the election.

Following power-sharing discussions that lasted several months, Prachanda was elected as Prime Minister by the Constituent Assembly on 15 August 2008 and he was sworn in as Prime Minister on 18 August 2008.

Prachanda resigned from the post of Prime Minister on 4 May 2009, after his move to sack the Nepalese Chief of the Army Staff Rookmangud Katawal was opposed by President Ram Baran Yadav. However, he remained in office until 23 May 2009, when his successor was elected.

During the 3 February 2011 election for a Prime Minister, Prachanda had filed candidacy on behalf of the Communist Party of Nepal (Maoist-Centre), but later withdrew his candidacy and supported CPN-UML Prime Ministerial candidate, Jhalanath Khanal. With his support, Mr. Khanal was elected as the new prime minister, replacing Madhav Kumar's caretaker government of more than six months.

He was slapped in public by an ordinary citizen in November 2012.

He was defeated by a Nepali Congress candidate, a little-known local Activist named KC Rajan, by a large margin of around 8,000 votes in Kathmandu constituency No.10 in the November 2013 Constituent Assembly election. Five years earlier, in the 2008 Constituent Assembly elections, Prachanda had defeated the same candidate by 11,000 votes. Nevertheless, Prachanda won a seat in a different constituency. His political party won only 26 directly elected seats whereas it had won 120 seats in the 2008 election.

Bhattarai's strategy has worked until now; it put forward the party as a major stakeholder in the nation's politics. Chairman Prachanda and Bhattarai seem to disagree with the strategy of the other senior leader—Mohan Vaidya alias Kiran. The two Leaders agree to strengthen the newly established democratic republic, rather than implementing a people's republic immediately. They agree that the coming years will be a 'decade of economic revolution' that will change the country's economic profile. The relationship came to a crisis when Bhattarai was not given the second position in the government by Prachanda. But it seems settled after Bhattarai agreed to this decision by Prachanda.

In August 2016 Pushpa Kamal Dahal was elected for a second stint as Prime Minister of Nepal. Prachanda became the 24th prime minister since Nepal's adoption of multi-party democracy in 1990 and the eighth since the abolition of the monarchy in 2008. He resigned from the post of Prime Minister on 24 May 2017 and was succeeded by Sher Bahadur Deuba of the Nepali Congress in June.