Armed conflicts pose a serious and potentially long-term threat to institutions, societies and environments across the world. This study focuses on the small mountainous country of Nepal, which has experienced high levels of armed conflict for many years. This paper analyses the relationship between local forest institutions, institutional embeddedness and forest condition under conditions of active armed conflict. Seven community forest user groups with similar forest governance structure were examined, located in similar biophysical and ecological zones, but experiencing different degrees of conflict. Those forest user groups facing severe armed conflict showed a decline in institutional arrangements but improvements in characteristics of institutional embeddedness, such as trust and reciprocity, whereas the forest user groups in low conflict environments had more stable institutional arrangements and stable embeddedness characteristics. Both types of locations showed an increase in forest density. These results emphasize the capacity of local institutions to organize and cooperate even in extremely vulnerable situations, building trust and reciprocity for sustainable forest use and management.