Troops and protesters face off at Thai PM's office

BANGKOK (Reuters) - A stand-off continued on Tuesday between Thai troops and thousands of anti-government protesters who have besieged the prime minister's office for three weeks, after a day of violence in which two people died.

Sovereign analysts have said that beside the damage to Thailand's crucial tourism industry, the main risk from political instability was that foreign and domestic investment, already hit by the global economic crisis, would suffer a further blow.

All was calm at Government House Tuesday, in contrast to the violent scenes a day earlier at a major intersection in the capital, which the red-shirted demonstrators had barricaded and which troops cleared with repeated charges, firing shots.

Prime Minister Abhisit Vejjajiva, who declared a state of emergency in Bangkok Sunday, told Reuters it was a "do-or-die" moment for the rule of law and said he would not negotiate with the protesters' figurehead, exiled ex-premier Thaksin Shinawatra.

Financial markets remained closed for the three-day Thai New Year holiday, reopening Thursday. The holiday meant the roads of Bangkok, normally clogged, were quiet this week.

Rating agencies Standard & Poor's and Moody's, which have a negative outlook on Thailand's sovereign ratings, said the latest unrest increased the risk of a downgrade.

"What we'll watch now is to see how unstable the situation becomes, and try to figure out what the lasting impact will be, mainly on investment in the economy ... because continued unrest would be bad for domestic investors to put their money at risk as well as foreign investors," said Thomas Byrne, senior vice president and regional credit officer for Moody's in Singapore.

Hundreds of troops were rotated during the night at Government House, but many of the soldiers and police slept, a Reuters reporter said. Around 6,000 demonstrators remained camped in the grounds of the prime minister's office.

Some of the demonstrators expected troops to move in during the night, felling trees and laying them across a main road between the troops and the centre of the protest in preparation. Disabled buses in the street were doused with petrol.

TWO DEAD

Thailand's intractable political crisis broadly pits royalists, the military and the urban middle-class against the rural poor loyal to Thaksin.

Abhisit told Reuters that dissolving parliament could lead to electoral violence. But he said he was willing to listen to the grievances of some of the protesters.

"I'm not interested in making a deal with Thaksin," he said.

"But I do listen to the concerns of some people who have joined the 'red shirts' in terms of democratic developments. In particular, if they are not satisfied with the constitution, if they think there may be some injustice in the system, I am happy to address those."

The tourist sector was barely picking up after a one-week shutdown of Bangkok's airports by protesters opposed to Thaksin late last year when a government allied to him was in power. Several countries have issued advisories on travel to Thailand.

Monday black smoke had billowed over the city of 12 million people after protesters set fire to buses to block the troops. The side of one government building was ablaze.

Thaksin, ousted in 2006 coup and living in exile to avoid jail on a corruption conviction, also popped up on international TV networks from an undisclosed location, claiming that many people had died Monday.

A government minister and medical officers said two people had died, both of them in skirmishes between residents and protesters, many of whom were bussed in from outside the capital.

The Emergency Medical Institute said Tuesday that 113 people, including soldiers, had been injured in the clashes.

Thailand's top military commander, General Songkitti Chakabakr, said in a televised statement Monday that the authorities would strive to bring the situation back to normal as soon as possible through peaceful means.

Saturday protesters had forced the cancellation of a high-profile Asian summit in Thailand, a big embarrassment for Abhisit, who took office only in December.

The political strife in Thailand died down for a while after he came to office last December through parliamentary defections that Thaksin supporters say were engineered by the army.

They are demanding new elections, and protests flared up after Thaksin said Abhisit must resign by April 8 -- the day before the now abandoned East Asia Summit started.

(Writing by Alan Raybould; Editing by Jeremy Laurence)