By Martin Petty and Bill Tarrant
BANGKOK (Reuters) - Thai protesters occupying Bangkok's main shopping district for two weeks said on Wednesday they were open to talks but they also took steps to prepare for a clash with armed troops threatening to forcibly evict them.
While the demonstrators in Bangkok fortified their base with bunkers built of sharpened bamboo poles and tyres, nearly a thousand protesters in northeastern Khon Kaen province seized an 18-car train carrying soldiers.
The comments on talks signalled some flexibility in a tense six-week confrontation that prompted the central bank on Wednesday to say interest rates would not start rising from a record low until the political situation was clearer.
While some Asian countries have already started to reverse steep declines in interest rates, the Bank of Thailand announced it was keeping its benchmark rates at 1.25 percent, noting that heightened political risk was "affecting confidence, tourism, private consumption and investment."
The protests have frightened away tourists following a deadly clash on April 10 between the army and the demonstrators that killed 25 people and wounded more than 800.
Interviews with leaders of the mostly rural and working-class "red shirt" protesters indicated they may bend on their demands for a snap election.
Kwanchai Praipana, a red shirt leader from their stronghold in northeast Thailand, said he would propose to the group's leaders they consider a three-month timeframe for Prime Minister Abhisit Vejjajiva to dissolve parliament and call elections.
"The government has the upper hand and maybe we should show some flexibility," he told Reuters next to a stage of the rally site, where about 15,000 people have gathered in an area of department stores that have closed their doors for two weeks.
Talks between Abhisit and the protesters collapsed last month after two rounds when the red shirts rejected an offer to dissolve parliament within nine months -- a year early. It is unclear if Abhisit would agree to a three-month timetable.
In recent days he has shown no sign of compromise.
Government spokesman Panitan Watanayagorn said Abhisit would be willing to hold talks with the protesters only if they agreed not to escalate tensions -- a vague requirement that could suggest their rally must end before negotiations can resume.
He declined to elaborate or to comment on the protesters' insistence talks be conducted through a third party.
The offer of talks comes two days after hundreds of armed troops converged on a road in the financial district, just an intersection away from the shopping area controlled by the protesters. Some troops have guns trained on the protesters from atop a foot-bridge after the army said it might use force.
"They've seen the signs that the noose is tightening around their necks -- there's not much appetite to become martyrs," Federico Ferrera, a political science professor at National University of Singapore, said of the protesters.
TRAIN SEIZED
By nightfall, hundreds of pro-government demonstrators taunted the red shirts at the financial district intersection, held back by a thin line of riot police, as troops looked on.
Protesters hurled abuse back and set off firecrackers to unnerve soldiers, many armed with loaded M-16 assault rifles.
About 450 km (280 miles) away in Khon Kaen province, nearly a thousand red shirts stopped an 18-car train carrying soldiers and army vehicles from leaving a station.
The train was meant to bring troops to Thailand's deep south to help contain a Muslim insurgency, but the protesters mistakenly thought the soldiers were to be deployed in Bangkok, a railway police officer told Reuters by telephone from Khon Kaen.
Negotiations between a Khon Kaen deputy governor and red shirt leaders went on into the night.
Analysts say the protests are radically different from any other period of unrest in Thailand's polarising five-year political crisis -- and arguably in modern Thai history, pushing the nation close to an undeclared civil war.
The demonstrations have evolved into a dangerous standoff between the army and a rogue military faction that supports the protesters and includes retired generals allied with twice-elected and now fugitive former premier Thaksin Shinawatra.
The protesters have demanded immediate elections, but both sides want to be in power during a September military reshuffle.
If Thaksin's camp prevails and is governing at the time of the reshuffle, analysts expect big changes including the ousting of generals allied with Thailand's royalist elite, a prospect royalists fear could diminish the power of the monarchy.
But despite the turmoil, some big foreign manufacturers -- most of them with plants well away from the capital -- said they are maintaining their investment policies.
"GM Thailand does not currently have any plans to review its investments in Thailand," said Sasinan Allmand, public relations director for Thailand at the Thai unit of General Motors.
The world's largest maker of disk drives, Seagate Technology, echoed that. "Business goes on as normal," said a senior Seagate communication official.
The central bank, however, said the political situation was threatening the economy -- Southeast Asia's second biggest.
Most economists had expected it to start raising rates from June, but some said after Wednesday's statement it may tighten later than that if the protest movement drags on or if violence escalates.
"Looking forward, the policy outlook is subject to how the protests unfold in the coming weeks," said Usara Wilaipich, economist at Standard Chartered Bank.
Abhisit came to power in December 2008 in an army-brokered parliamentary vote after the ruling pro-Thaksin party was dissolved for electoral fraud.
(Additional reporting by Orathai Sriring and Nopporn Wong-Anan. Writing by Jason Szep; Editing by Sanjeev Miglani)
