The Nepal Airlines plane with 15 passengers and three crew crashed into a forested hill in Arghakhanchi district, 226 kilometres (140 miles) west of the capital, with aircraft pieces found in a nearby village, an aviation official told AFP.
"The plane crashed into a hill, police have found its wreckage in a village, but no survivors," Bimlesh Lal Karna, chief air traffic controller at the country's largest airport in Kathmandu, told AFP.
"Most of the plane is completely broken into small pieces, no one could have survived the accident," he added.
The plane, carrying locals and one passenger from Denmark, lost contact with air traffic controllers shortly after taking off from the popular tourist town of Pokhara on Sunday afternoon.
The aircraft from the state-run carrier encountered heavy rain en route from Pokhara to the town of Jumla, 353 kilometres west of Kathmandu.
The downpour hampered Sunday's efforts to locate the plane, with two helicopters forced to turn back because of bad weather.
Police resumed their search at first light on Monday, finally spotting scattered pieces of the wreckage during an aerial search of Arghakhanchi.
Steep terrain prevented the helicopter from landing in the forested area, prompting police to be dropped to the ground instead, aviation official Karna said.
The passengers included Manab Sejuwal, a local politician from the ruling Nepali Congress party.
Police trace passengers' phones
More than 150 Nepalese soldiers and police had fanned out across the hilly region from Sunday afternoon, trekking uphill and using mobile phone signals to try to locate the aircraft, officials said.
"Some of the passengers' mobiles are still on, so we used the help of phone companies to get a rough idea of the area where the planes might have crashed," Karna said.
The incident again raises concerns about the Himalayan nation's aviation sector, which has come under fire from international authorities after a series of fatal accidents.
The European Union in December banned all the country's airlines from flying to the EU.
Nepal, which counts tourism as a major contributor to its economy, has suffered a number of air crashes in recent years, which have usually been attributed to inexperienced pilots, poor management and inadequate maintenance.
A Chinese tourist and a local pilot were killed when an ultra-light aircraft crashed into a hill in Pokhara last October.
Last May, 21 people including eight Japanese tourists were hurt when a small plane skidded off an airport runway in northern Nepal and plunged into a river.
Fifteen people were killed at the same airport in May 2012 when a plane carrying Indian pilgrims crashed into a mountain.
In September 2012, 19 people, including seven Britons and four Chinese, were killed after an Everest-bound plane crashed minutes after taking off from Kathmandu in an accident which the government blamed on a "panic-stricken" pilot.
At the time of the blacklisting last year, EU Transport Commissioner Siim Kallas said the country's safety record "does not leave us any other choice".
Government officials said the ban was "unfortunate" and came after months spent on upgrading safety and monitoring aircraft.