By Pracha Hariraksapitak and Ed Cropley
BANGKOK (Reuters) - Thai riot police fired tear gas and stun grenades after a day of street battles with anti-government protesters on Tuesday in which two people were killed and nearly 400 were injured.
The military put troops on the streets to back up the police, but the unarmed soldiers showed no desire to disperse the thousands of demonstrators from the People's Alliance for Democracy (PAD).
One man was killed by a car bomb and a female protester died as the PAD intensified its four-month campaign to unseat a government they say is the illegitimate puppet of ousted premier Thaksin Shinawatra.
Army chief Anupong Paochinda denied rumours of a coup, two years after the military removed Thaksin in a bloodless putsch.
"People should not panic. Soldiers will not launch a coup since it will not be good for the country," he told reporters.
The clashes began shortly after dawn when police used tear gas to force a path through 5,000 PAD members blockading parliament to disrupt the opening session.
By nightfall, 381 people had been injured, 48 seriously, after the worst street violence since the army and pro-democracy activists fought in 1992.
Two policemen were shot and another stabbed during the unrest, which occurred mainly in Bangkok's administrative zone and did not spill into tourist areas.
Deputy Prime Minister Chavalit Yongchaiyudh, the government's chief negotiator with the PAD, resigned, saying police failed to exercise the restraint he had requested.
"Since this action did not achieve what I planned, I want to show my responsibility for this operation," he said.
After the army announcement, the PAD, an extra-parliamentary group of businessmen, academics and activists, began pulling back to the Government House compound it has occupied since August.
But youths continued to taunt police, who randomly fired stun grenades at the jeering crowd.
POLITICAL STALEMATE
The PAD accuses new Prime Minister Somchai Wongsawat of being a proxy for Thaksin, his brother-in-law, and vowed to keep campaigning until he dissolved parliament.
It argues Thai democracy has been undermined by billionaire Thaksin, who skipped bail in August and fled to Britain to escape corruption charges, and his allies. It has called for "new politics" that would include a proportion of appointed MPs.
"We will stay on, we will fight on," PAD leader Sonthi Limthongkul told a cheering crowd at Government House.
Analysts predicted more political stalemate.
Ramkhamhaeng University analyst Boonyakiat Karavekphan said the PAD did not have enough support from the military or general public to deliver a knockout blow to the government.
"If Anupong was on its side, the PAD would have won by now," he told Reuters.
The unrest has hurt investor confidence and distracted policymakers when they should be focussed on slowing economic growth and fallout from the global credit crisis, analysts say.
Citing the protests, traders said the baht currency fell against the dollar and the stock market tumbled, although in both cases the credit crisis was also a major factor.
The baht was at 34.51 per dollar, down from 34.38 on Monday. Stocks fell 4.2 percent to a five-year low, failing to get a lift from a big Australian rate cut.
Somchai has sought a dialogue with the PAD but there seems little prospect of a compromise to end the political stalemate.
In his speech to parliament, he called for national reconciliation.
"This government is determined to tackle economic problems and to listen to all sides to find a solution to end the crisis," said Somchai, who was forced to leave by helicopter after protesters surrounded the parliament grounds.
(Additional reporting by Nopporn Wong-Anan and Adrees Latif; Writing by Darren Schuettler; Editing by Alan Raybould)
