By Nopporn Wong-Anan
BANGKOK (Reuters) - Thai anti-government protesters fortified their main rally site in an upmarket shopping area of Bangkok after the government warned they would be evicted, setting up a potentially bloody clash in the capital.
A smaller number of supporters of ousted Prime Minister Thaksin Shinawatra remained in the business district, throwing firecrackers at times to taunt troops, many armed with M-16 assault rifles.
The protest in the capital has shut some shopping malls for almost three weeks, forced luxury hotels to close and scared off tourists.
As a result, the central bank seems certain to leave interest rates at a record low of 1.25 percent at a meeting on Wednesday, worried that the hit to consumer confidence and business activity will damage the economic recovery.
"We will stay here indefinitely," Nattawut Saikua, a protest leader, told reporters in the Rachaprasong district of high-end department stores and top hotels on Tuesday.
But the red shirts called off a march in the nearby business district after an army spokesman said troops would use their weapons if provoked.
Nattawut said protesters were now concentrating on erecting fresh barricades and checkpoints in Rachaprasong, where around 5,000 red shirts are encamped, demanding that Prime Minister Abhisit Vejjajiva call an early election.
The tougher approach came after Abhisit handed over primary responsibility for security to his army chief.
"The handing of security control to the army and the changes to rules of engagement that facilitate the use of live rounds suggest that more violence is the most likely immediate outcome," said Tim Powdrill, a political risk analyst at Riskline ApS.
Abhisit told reporters after a weekly cabinet meeting on Tuesday the government would try to take control of the Rachaprasong intersection from the protesters as soon as possible, but he stopped short of giving a deadline.
Analysts say the six-week 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 ex-Prime Minister Thaksin, who was toppled in a 2006 coup.
Thai stocks jumped 5.4 percent on Tuesday, their biggest rise in 15 months, as the immediate risk of bloodshed receded. They had fallen 8.23 percent since clashes between troops and demonstrators on April 10 that killed 25 people.
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Some protesters were armed with petrol bombs, grenades and dangerous acids, army spokesman Colonel Sansern Kaewkamnerd told reporters on Tuesday, threatening a tough response to any attack.
"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," Sansern said.
Abhisit has repeatedly rejected demands to call an election he would almost certainly lose, saying the red shirts must be brought under control first. He came to power in December 2008 in an army-brokered parliamentary vote after the ruling pro-Thaksin party was dissolved for electoral fraud.
Parties allied with Thaksin, a former telecoms tycoon now based in Dubai, have won the past four elections in Thailand based on programmes to help the rural masses.
Both sides want to be in power for 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.
(Additional reporting by Martin Petty and Viparat Jantraprap; Writing by Bill Tarrant; Editing by Alan Raybould and Alex Richardson)
