By Nopporn Wong-Anan
BANGKOK (Reuters) - Thailand's "red shirt" protesters called off a march to Bangkok's business district on Tuesday after a stern warning from the army, but they threatened to stay in the capital's shopping district "indefinitely"
The supporters of ousted premier Thaksin Shinawatra also said they had enlisted their own special forces to tighten security in the shopping district they have occupied for 18 days, raising tensions in a bloody six-week protest demanding new elections.
At least two luxury hotels in the shopping district announced they had closed for the rest of this week for safety reasons.
"We will stay here indefinitely," Nattawut Saikua, a protest leader, told reporters in the Rachaprasong district of high-end department stores and luxury hotels, adding they would only hold a rally at a second site in the business area if soldiers leave.
He called off the march following the army's deployment of hundreds of troops, many armed with M-16 assault rifles, and after comments on Tuesday by an army spokesman who said troops would be tougher and use their weapons if provoked.
Analysts say the protest has evolved into a dangerous standoff between the army and a rogue military faction that supports the red shirts and includes retired generals allied with twice-elected and now fugitive former premier Thaksin.
Despite the tensions, Thai stock prices rallied after falling 8.23 percent since clashes between troops and demonstrators on April 10 that killed 25 people. Foreign investors resumed buying this week, pushing the index up as much as 4 percent at one point, its biggest one-day gain in 15 months.
Brokers attributed the surge to a combination of factors: bargain hunting by foreign investors of Thailand's recently beaten-down shares, along with news the red shirts were calling off their march to the business district -- a development that pushed the market up significantly in the afternoon.
Analysts, however, doubt the rally indicates a new trend given few signs of a political compromise. They expect choppy trading until either side shows a willingness to back down.
"We are still highly cautious on the political situation and we're not in the market at this stage," said Voravan Tarapoom, managing director at BBL Asset Management in Bangkok.
Swiss wealth manager Julius Baer urged its clients to stay on the sidelines. "Uncertainty remains very high in the short-term and this alone will prevent the market from recovering significantly until a clearer political outcome emerges," it said in a note to clients.
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While the protesters cancelled their march to the business district, hundreds remained at the entrance to it, where they had stockpiled sharpened bamboo poles.
Several thousand other red shirts were dug in at the shopping district, about 2 kms (1.2 miles) away.
"We can no longer use the soft to hard steps," army spokesman Colonel Sansern Kaewkamnerd told reporters. "If they try to break the line, we will start using tear gas, and if they do break the line, we need to use weapons to deal with them decisively."
He said some protesters were armed with petrol bombs, planks, grenades and dangerous acids.
Late on Monday, Prime Minister Abhisit Vejjajiva again rejected demands to call an election he would almost certainly lose, saying the red shirts must be brought under control.
Both sides want to be in power during a military reshuffle in September. If Thaksin's camp is governing at that time, analysts expect it would bring about major changes by ousting generals allied with Thailand's royalist establishment, a prospect that royalists fear could diminish the power of Thailand's monarchy.
Given the intransigence on both sides after more than a month of protests, analysts fear further violence.
"In all reality, it seems right now that another crackdown is the only way out," said Danny Richards, an analyst at the Economist Intelligence Unit.
The financial toll from the standoff, which has spawned rumours of a putsch in coup-prone Thailand, is growing.
Fitch ratings cut the country's long-term currency credit outlook to negative from stable on Monday.
Hotel occupancy is put at around 20 percent in a country heavily reliant on tourism for jobs.
"There isn't a guest left in our hotel now," said a receptionist at the Holiday Inn, one of the two luxury hotels that closed. "We are closing from (Tuesday) and plan to reopen on April 26 if the situation improves."
Amata Corp, Thailand's biggest seller of industrial land, said on Monday some Japanese clients had delayed signing land deals because of the political unrest.
The Thai baht firmed slightly, while bond yields eased further as investors bet the central bank would leave interest rates at a record low on Wednesday because the political crisis could hurt the economy.
(Additional reporting by Martin Petty and Viparat Jantraprap; Writing by Jason Szep. Editing by Bill Tarrant)
