Most rivers in Nepal originate in the high mountain glaciers and flow into the Ganges serving as the primary source of fresh water for the whole region. However, global warming-induced changes in temperature and rainfall patterns are accelerating the rate of deglaciation, the frequency of glacial lake outburst, massive flooding, and droughts. Moreover, the climate-induced changes in Nepalese river systems, which contribute more than 70 percent of the dry season river flow to the Ganges, is significantly affecting transboundary water supply and use in Nepal, India, and Bangladesh. In this light, this study uses a hydro-economic model to determine the optimal allocation of water in Fewa Lake watershed among four competing uses - irrigation, municipal use, power generation, and recreational use. Preliminary results show considerable opportunity to increase economic efficiency, equity, and sustainability. For example, construction of additional reservoir storage capacity and better use of available rainfall and river flow data in managing existing reservoir systems can substantially improve power generation capacity, ability to control flood, and increase irrigation productivity without significantly reducing downstream flow.