Rupees is the local currency of Nepal. Normally you can pay by Foreign Currency, of course Rupees or by Credit card in major tourist class hotels, restaurants, airlines, and bigger stores in Kathmandu, Bhaktpur, Patan, Pokhara etc. While you are paying by credit card more or less you have to pay 4% extra on top of the total amount which is enforce by the bank.
You can have maximum numbers of ATM machine around Thamel. Some of the ATM will let you only Rs10,000 and some will let you up to 35,000 rupees once a time. Normally it will deduct USD 5 per transaction whatever the amount you withdraw from Nepalese bank and it might charge you some international fee according your local bank policy.