The crop-livestock integrated farming system practiced in hilly regions of developing countries largely depends on the ecosystem. More specifically, the livestock component of the farming system relies heavily on natural resources such as forest, grazing and agricultural land for the supply of feed and fodder. The importance of animals as agents of nutrient recycling, sources of rural energy in terms of draught power and fuel, as well as being major contributors to the farm economy, has resulted in an increased population of ruminants in these regions, creating a threat to the sustainability and productivity of these land resources. This paper is an attempt to evaluate the livestock carrying capacity of land resources and to formulate the optimum herd size compatible with the differently resourced farm categories within the Kumpur subwatershed of the mid-hills in Nepal. Our analysis reveals that the livestock carrying capacity of the land resources at the watershed level is 11696 livestock units (LU), whereas current stocking is 12985 LU, suggesting an overstocking of 1289 LU at the watershed level. Total feed supply from different sources is 12668 mt/year whereas current total digestive nutrient (TDN) demand is 14060 mt/year, a negative balance of 1393 mt/year. The excess livestock at the subwatershed level directly implies excess livestock holding, producing a poor nutritional status for the farm household. Linear programming analysis reveals that the farmers of large, medium and small category farms can optimize their livestock holding by a combination of 3 LU buffaloes and 4 LU goats, 2 LU buffaloes and 4 LU goats and 1 LU buffaloes and 4.4 LU goats, thus, giving maximum return to the farm family without exerting pressure on natural resources.