Objective: To evaluate the drug dispensing practices and patients' knowledge on drug use among the outpatients and to identify and analyze the problems in drug prescribing and dispensing. Methods: A prospective cross-sectional descriptive study was conducted using World Health Organization (WHO) core drug use indicators from July 13, 2008 to August 15, 2008 in Manipal Teaching Hospital, Pokhara, Nepal. Results: A total of 4231 prescriptions were encountered with the total of 10591 drugs prescribed. The average number of drug per prescription was 2.5. Only 13% (n= 10591) of drugs were prescribed by generic name. Percentage of drug prescribed from WHO model list of Essential drugs, Essential drug list of Nepal and Nepalese National Formulary was 21.7%, 32.8% and 42.3% respectively. Antibiotics and injections encountered were 28.3% and 3.1% respectively. Average cost per prescription was found to be Nepalese Rupees (NRs) 285.99 (US $ 3.73). Patient knowledge on correct use of drugs and appropriate labeling was found to be 81% and 1.4% respectively. Average dispensing time per prescription was 52 seconds. Conclusion: The finding from current study shows a trend towards irrational prescribing and dispensing. Hence, there is a need for effective intervention programme to encourage the physicians and dispensing pharmacists in promoting more rational drug use.