Thai troops fire their assault rifles into the air. (AAP)
Thai anti-government protesters threatened with a military offensive have abandoned a three-week rally at the premier's office, pulling the kingdom back from a potentially bloody showdown in the streets.
A day after skirmishes in Bangkok left two dead and 123 injured - two seriously, troops and police on Tuesday tightened their grip on thousands of protesters dug in around Government House, the offices of Prime Minister Abhisit Vejjajiva.
In the face of the overwhelming army operation, organisers agreed to disperse in a major victory for Abhisit, who had appeared on the verge of losing his hold on power after four months in the job.
"All of my brothers and sisters, please give up and board these buses provided by police," top protest leader Veera Musikapong said, clambering onto a police truck to address the crowd.
"Police will take good care of you," he said as the demoralised crowd stripped off the red shirts that have symbolised their campaign for the return of ousted premier Thaksin Shinawatra.
But as hundreds of weary demonstrators headed for home, mostly in the country's northeast that is the heartland of Thaksin's support, others defiantly said their campaign to dislodge Abhisit would continue.
"We have stopped the protest but we haven't stopped the fight for democracy. We will continue the movement," said staunch Thaksin ally Nattawut Saikuar.
Police and the army said that protesters not involved in Monday's street violence would be allowed to return home but that "hardcore" figures were being detained, with protest leaders facing imminent arrest.
The government had said it wanted a peaceful end to the crisis, after troops on Monday used tear gas and automatic weapons fire to clear demonstrators from the rest of Bangkok, which remains under a state of emergency.
As dawn broke on Tuesday, hundreds of soldiers brandishing assault rifles and riot shields advanced on Government House, and armoured personnel carriers and other vehicles blocked all access points.
The military used loudspeakers mounted on trucks to issue further warnings to disperse or face the consequences.
The number of protesters at the site fell to around 2,500 overnight as the pressure mounted on Thaksin's so-called "Red Shirts" after hours of running battles in sweltering heat the day before.
Army spokesman Colonel Sunsern Kaewkumnerd said troops had also suppressed protests in three provinces on Monday, during which demonstrators took control of a television station and a railway terminal.
Abhisit has hailed the success of the military campaign to dislodge the protesters, amid fears of a repeat of the violence in Bangkok last October in which two people died and 500 were injured.
He was under huge pressure to end the crisis quickly to prevent further damage to Thailand's international image, after years of unrest following the military coup that ousted Thaksin in 2006.
Several countries advised tourists not to travel to Thailand or to exercise caution if they are already there, while the US State Department condemned the "unacceptable violence" by the protesters.
Australian Foreign Minister Stephen Smith had urged Thailand to find a peaceful and lawful resolution to the unrest.
"The last thing we want to see is Thailand again revert to military rule or move away from democracy."
He said while there were up to 55,000 Australians living, working or holidaying in Thailand, they had not been targeted by protesters.
On Tuesday, Thailand's public health ministry upped the toll of injuries from street protests in the capital, saying that two people had died and 123 were wounded, two of them seriously.
It said on Tuesday the two deaths were caused by shooting during clashes between demonstrators and local residents a day earlier.
"There are 123 wounded, two died and 50 have been hospitalised including two who are in a serious condition but out of danger," the ministry said in a statement.
"Both victims were men from Bangkok who fought with protesters Monday evening," it said.
Cabinet minister Satit Wonghnongtaey said that three residents had been shot by protesters, clad in red shirts and loyal to ex-premier Thaksin Shinawatra, and that one 54-year-old had died in hospital.
An official at the privately-run Hua Chiew Hospital near the clash site said that a 19-year-old man had also been killed and five others taken to hospital with injuries.
Officials at Bangkok General Hospital confirmed the death of the 54-year-old and said they were treating two more men, one 39-year-old shot in the foot and a 51-year-old man who was bruised.
Abhisit said 23 troops were among the injured.
The Red Shirts want Abhisit to quit and call new elections, saying he came to power through an undemocratic parliamentary vote following a court ruling that drove Thaksin's allies from office.
Analysts say there is little hope of a long-term solution to Thailand's problems so long as it remains divided between Thaksin's mostly poor supporters and his foes in the power circles of the palace, military and bureaucracy.
