In the wake of the failed political reforms of the 1949-52 period came a major shake-up in the royal family. By mid-1953, the younger members of the royal family, which may have included the king himself, challenged domination by the king's uncles. The rift became public in September 1953 when the king's cousin and brother-in-law, Mohammad Daoud, became prime minister. Daoud was the first of the young, Western-educated generation of the royal family to wield power in Kabul. If opponents of the liberal experiment hoped he would move toward a more open political system, however, they were soon disappointed.

Despite Daoud's concern with correcting what he perceived as previous governments' pro-Western bias, his keen interest in modernization manifested itself in continued support of the Helmand Valley Project. Daoud also proceeded cautiously on the question of the emancipation of women. At the fortieth celebration of national independence in 1959, the wives of his ministers appeared unveiled in public at his behest. When religious leaders protested, he challenged them to cite a single verse of the Quran specifically mandating veiling. When they continued to resist, he jailed them for a week.

Daoud's social and economic policies were cautiously reformist and relatively successful. Although fruitful in some respects, his foreign policy caused severe economic dislocation, and, ultimately, his own political eclipse. Daoud's foreign policy was guided by two principles: balancing what he saw as pro-Western orientation on the part of previous governments by improving relations with the Soviet Union (without sacrificing U.S. economic aid), and pursuing the Pashtunistan issue by every possible means. To some extent the two goals were mutually reinforcing when hostile relations with Pakistan caused the Kabul government to fall back on the Soviet Union and its trade and transit link with the rest of the world. Daoud believed that the rivalry between the two superpowers for local allies created a condition whereby he could play one against the other in his search for aid and development assistance.

Daoud's desire for improved bilateral relations with the Soviet Union stepped up a notch to a necessity when the Pakistan-Afghan border was closed for five months in 1955. When the Iranian and United States governments declared that they were unable to create an alternate trade access route through Afghanistan, the Afghans had no choice but to request a renewal of their 1950 transit agreement with the Soviet Union. Ratified in June 1955, it was followed by a new bilateral barter agreement. After the Soviet leaders Nikolay Bulganin and Nikita Khrushchev visited Kabul in 1955, they announced a US$100 million development loan for projects to be mutually agreed upon.

Despite the Cold War climate between the two superpowers, the Daoud regime also sought to strengthen its ties with the United States, whose interest in Afghanistan had grown as a result of United States efforts to forge an alliance among the countries in the "Northern Tier": Afghanistan, Iran, Iraq, Pakistan, and Turkey. Maintaining its nonaligned position, Afghanistan refused to join the United States-sponsored Baghdad Pact. This rebuff did not stop the United States from continuing its low-level aid program, but it was reluctant to provide Afghanistan with military assistance, so Daoud turned to the Soviet Union and its allies for military aid, and in 1955 he received approximately US$25 million of military matériel. In addition, the Soviet bloc also began construction of military airfields in Bagram, Mazar-e-Sharif, and Shindand.

In the face of Daoud's virtual obsession with the Pashtunistan issue, all other foreign policy issues faded in importance. In 1953 and 1954, Daoud applied more of his time-honored techniques to press the Pashunistan issue, such as payments to tribesmen on both sides of the border to subvert the Pakistani government as well as dissemination of hostile propaganda. In 1955, however, the situation became more critical from Daoud's point of view when internal politics forced Pakistan to abolish the four provincial governments of West Pakistan and form one provincial unit (the One Unit Plan). The Afghan government protested the abolition of the North-West Frontier Province (excluding the Tribal Agencies). The Pakistan border closure in the spring and fall of 1955 again highlighted the need for good relations with the Soviets in order to keep transit routes open for Afghan trade.

Although the Afghans remained unresigned to accepting the status quo on the Pashtunistan issue, the conflict remained dormant for several years (in which time relations improved slightly between the two nations). The 1958 coup that brought General Mohammad Ayub Khan to power in Pakistan also failed to bring on any immediate change in the situation. In 1960 Daoud sent troops across the border into Bajaur in a foolhardy, unsuccessful attempt to manipulate events in that area and to press the Pashtunistan issue, but Afghan military forces were routed by the Pakistan military. During this period the propaganda war, carried on by radio, was relentless.

Afghanistan and Pakistan severed relations on September 6, 1961. Traffic between the two countries came to a halt, just as two of Afghanistan's major export crops, grapes and pomegranates, were ready to be shipped to India. In a valuable public relations gesture, the Soviet Union offered to buy the crops and airlift them from Afghanistan. What the Soviets did not ship, Ariana Afghan Airlines flew to India in 1961 and 1962. At the same time, the United States attempted to mediate the dispute, although its ties with Pakistan were a stumbling block.

In addition, much of the equipment and material provided by foreign aid programs and needed for development projects was held up in Pakistan. Another outgrowth of the dispute was Pakistan's decision to close the border to nomads (members of the Ghilzai, variously known as Powindahs or Suleiman Khel), who had long been spending winters in Pakistan and India and summers in Afghanistan. The Pakistani government statement denying the decision was related to the impasse with Afghanistan appeared disingenuous, and the issue added to the brewing conflict between the two countries. Afghanistan's economic situation continued to deteriorate. The government was heavily dependent upon customs revenues, which fell dramatically; trade suffered; and foreign exchange reserves were seriously depleted.

By 1963 it became clear that neither Daoud of Afghanistan nor Ayub Khan of Pakistan would yield; to settle the issue one of them would have to be removed from power. Despite growing criticism of Ayub among some of his countrymen, his position was generally strong, whereas Afghanistan's economy was suffering. In March 1963, with the backing of the royal family, King Zahir Shah sought Daoud's resignation on the basis that the country's economy was deteriorating as a result of his Pashtunistan policy. Because he controlled the armed forces, Daoud almost certainly had the power to resist the king's request, yet he resigned, and Muhammad Yousuf, a non-Pashtun, German-educated technocrat who had been minister of mines and industries became prime minister.

Data as of 1997