As talks unravelled, fighting erupted again in the Din Daeng district north of a central Bangkok shopping area occupied for six weeks by protesters seeking to topple Prime Minister Abhisit Vejjajiva, who they accuse of subverting democracy.
Troops fired warning shots as protesters burned tires and hurled petrol bombs, but the violence was substantially less intense than in recent days.
Several thousand protestors, who have adopted red as a protest color and broadly support former premier Thaksin Shinawatra, remain in a barricaded encampment in Bangkok's high-end shopping, hotel and diplomatic district, refusing to leave, though looking visibly worn down.
"Sure I want to go home but I want democracy first," said Chamlat Ladlao, a protester in his 50s from central Lopburi province. "I'd rather stay here, be proud and die fighting than die in my village when I'm old."
Government officials criticised a proposal from a group of 64 senators in the 150-member upper house who have offered to mediate peace talks and have urged a ceasefire.
Satit Wongnongtaey, minister to the prime minister, said talks could only take place if the red shirts end their protest -- a condition the protesters have consistently rejected.
"The government says we can only negotiate when the protest ends," he said in a televised statement.
The mostly rural and urban poor "red shirts" accuse the British-born, Oxford-educated Abhisit of lacking a popular mandate after coming to power in a controversial parliamentary vote in 2008 with tacit backing from the military.
Authorities warned the red shirts to leave their barricaded encampment by Monday afternoon, but the deadline came and went, raising questions over how long the military operation would continue and whether talks would work.
Public holidays have been declared until Friday.
Troops have thrown a cordon around the protest site, a "tent city" at the Rachaprasong intersection, paralysing the heart of Bangkok. Hundreds of women and children have taken refuge in a temple inside the protest area.
On the outskirts of their encampment, small groups of protesters continue to challenge the soldiers, hurling petrol bombs and stones at a checkpoint on Rama IV Road leading to the business district, and burning tyres in Din Daeng, scene of intense fighting over the weekend, Reuters witnesses said.
Army spokesman Sansern Kaewkamnerd said "terrorists" have tried to stir trouble through random killings, targeting innocent people at rallies, rescue workers and journalists, including an incident on Monday in an apartment block under construction.
"A group of snipers dressed as soldiers were hiding on floors 24 to 27 aiming randomly at people, and that is being blamed on soldiers," he told a televised briefing.
Thai media reported a fire was raging in a row of deserted shops in the same area on Tuesday and firefighters were struggling to get into the area because of barricades.
Erawan Emergency Medical Centre said on Tuesday that 38 people had died in the flare-up of violence since May 13 and 67 have been killed people since trouble started in April.
The protesters, mostly drawn from the rural and urban poor, and supporters of ousted ex-Premier Thaksin Shinawatra, had initially demanded immediate elections.
