Almost completely cut off for centuries, it has tried to let in some aspects of the outside world while fiercely guarding its ancient traditions.
The Bhutanese name for Bhutan, Druk Yul, means "Land of the Thunder Dragon" and it only began to open up to outsiders in the 1970s.
The Wangchuck hereditary monarchy has wielded power since 1907. But Bhutan became a two-party parliamentary democracy after elections in March 2008. This gave a landslide victory to the pro-monarchy Bhutan Harmony Party of former prime minister Jigme Thinley. The opposition People's Democratic Party also supports the monarchy.
Tourism is restricted; visitors must travel as part of a pre-arranged package or guided tour. Backpackers and independent travellers are discouraged.
Buddhist culture
King Jigme Singye Wangchuck - the father of the present monarch - went to great lengths to preserve the indigenous Buddhist culture of the majority Drukpa people. This ethnic group has a common culture with the Tibetans and other Himalayan peoples.
National dress is compulsory - the knee-length wrap-around "gho" for men and the ankle-length dress known as the "kira" for women.
The Bhutanese monarchy has also promoted the philosophy of "Gross National Happiness" (GNH), which strives to achieve a balance between the spiritual and the material.
But by the 1990s, attempts to stress the majority Buddhist culture and the lack of any political representation had led to deep resentment among the ethnic Nepali community in the south.
Refugees
Some 100,000 refugees live in UN-supervised camps in Nepal. Out of this refugee population have sprung a number of insurgent groups - the Bhutan Communist Party (Marxist-Leninist-Maoist), the Bhutan Tiger Force and the United Revolutionary Front of Bhutan.
The Bhutanese security forces believe they are behind the wave of bombings that rocked the kingdom in the run-up to the 2008 parliamentary elections.
The leaders of Nepal and Bhutan had promised to try and repatriate the refugees before the elections. However, there has been little progress on this front.
India does not allow the refugees onto its territory which lies between Bhutan and Nepal, and although the US and some other countries have agreed to accept tens of thousands of the refugees, some refugee leaders say that the only acceptable path is complete repatriation to Bhutan.
Facts
* Full name: Kingdom of Bhutan
* Population: 708,500 (UN, 2010)
* Capital and largest city: Thimphu
* Area: 38,364 sq km (14,812 sq miles)
* Major language: Dzongkha (official)
* Major religions: Buddhism (official), Hinduism
* Life expectancy: 66 years (men), 70 years (women) (UN)
* Monetary unit: 1 ngultrum = 100 chetrum
* Main exports: Electricity, timber, cement, agricultural products, handicrafts
* GNI per capita: US $1,880 (World Bank, 2010)
* Internet domain: .bt
* International dialing code: +975
Leaders
Jigme Khesar Namgyel Wangchuck succeeded his father, Jigme Singye Wangchuck, in December 2006 after the former monarch announced his abdication. His formal coronation was postponed until after the country's transformation into a parliamentary democracy had been completed and did not take place until November 2008.
The new king, who was 26 when he became head of state, promised to build on his father's efforts to democratise Bhutan. His predecessor had already given up some of his absolute powers in 1998 and ruled in conjunction with the government, an assembly and a royal advisory council.
Jigme Khesar Namgyel Wangchuck studied in the US and at Oxford University, where he completed an MA in politics.
He insisted that it was critically important for Bhutan to complete the process of becoming a constitutional monarchy, despite the reluctance of many Bhutanese to see a diminution of the monarch's powers.
In the run-up to the March 2008 elections, he travelled extensively around the country, encouraging people to take part in the vote.
The high regard in which the Bhutanese monarchy is held, and the former king's foresight in scaling back its powers, makes it unlikely that it will suffer the same fate as the royal family in Nepal.
Prime Minister: Jigme Thinley
He is the leader of the Bhutan Harmony Party, which won most votes in the parliamentary election.
The election was intended to mark the completion of the country's peaceful transition from an absolute monarchy to a constitutional one. The move to democratic rule was ordered by the state's popular royal house, the Wangchucks.
Mr Thinley has served as prime minister on two previous occasions, although the post has hitherto rotated among members of the council of ministers.
He can be expected to wield more power and serve as long as he retains the confidence of parliament and the king.
Born in 1952, he was foreign minister between 1998 and 2003 and later served as home affairs minister.
From : BBC News
