A Red Shirt protest leader called an aide to Thailand's prime minister on his cell phone on Monday and proposed a cease-fire between demonstrators and troops, the aide said.
Korbsak Sabhavasu said he received a phone call from Nattawut Saikua, one of the Red Shirt leaders, on Monday and they spoke for five minutes.
Korbsak said he told Nattawut that if the Red Shirt fighters retreat to their encampment "there will be no single bullet fired by the soldiers."
Fighting between Thai troops and anti-government protesters continued on Monday and one soldier was killed. A government deadline demanding that the demonstrators vacate a protest zone passed without capitulation.
The government had given an estimated 5,000 people hunkered down in a sprawling protest encampment in central Bangkok until 3 p.m. local time (0800 GMT) to leave or face criminal charges.
After their plea for a ceasefire and U.N.-moderated talks was dismissed by the government on Sunday, protest leaders said on Monday they would accept talks as long as a neutral arbiter took part and troops withdrew.
Government spokesman Panitan Wattanayagorn replied that rioting and violence against troops must end first.
"The government is ready to go forward with negotiations when the situation is defused, when the protest ends, violence ends, attacks on authorities end," he said, which appeared to put an end to any hope of a negotiated end to the unrest.
Across the city, people were hoarding food and hotels were pleading for guests to leave. Schools have been closed and Monday and Tuesday were declared public holidays, although financial markets and banks remained open.
As the fighting subsided on Monday, residents in the commercial district were seen dragging luggage and their children out of the area. Chulalongkorn Hospital, adjacent to the encampment, had evacuated all of its patients.
Fighting near the encampment was intense overnight. A rocket hit the 14th floor of the Dusit Thani Hotel, a Reuters photographer said, triggering gunfire from "all around" in pitch blackness, since power had been cut to the area.
Guests at the Dusit Thani were evacuated on Monday morning after spending much of the night cowering in the basement.
Fighting spread to two new areas of the city of 15 million people at the weekend as the army struggled to impose a security cordon around the encampment occupying a 1.2 sq-mile area of the commercial district.
"Everybody was evacuated from their room and spent the night in the basement," said the photographer. "There was a lot of shooting," he said, adding fire had damaged parts of the hotel.
A military checkpoint was being set up outside the last remaining entrance to the encampment, which would complete the security cordon, a witness said.
Military helicopters dropped leaflets on the camp, barricaded with walls made of tires, bamboo poles and razor wire, calling on the protesters to leave immediately.
Death of renegade general
The death on Monday of a renegade major-general who was the Red Shirts' military adviser, threatened to further stoke tensions in Bangkok.
Maj-Gen Khattiya Sawasdipol, better known as Seh Daeng (Commander Red), was shot in the head on Thursday in an assassination that fuelled the latest eruption of violence in a five-year crisis pitting rural and urban poor against the "establishment elite" that has traditionally run Thailand.
Protest leader Jatuporn Prompan told supporters in the encampment, including women and children: "The king's glorious mercy is the country's only hope now. It's the only way out."
King Bhumibol Adulyadej, 82, has stepped in to end past crises during his 63 years on the throne but has been in hospital for seven months and has not publicly commented on this latest crisis since March.
Prime Minister Abhisit Vejjajiva vowed "no retreat" against "armed terrorists" seeking to topple his government.
The Red Shirts, mostly loyal to former premier Thaksin Shinawatra who was ousted in a 2006 coup, say Abhisit's army-backed government, which came to power 18 months ago in a controversial parliament vote, is illegitimate and they want him to call elections now.
At least 66 people have been killed and more than 1,600 wounded since the Red Shirts began their protest in mid-March.
"We can't see when the turmoil will end now, and it seems the situation is just getting fiercer," said Kavee Chukitkasem, research head at Kasikorn Securities. "Protesters are separating to many different spots and the government isn't retreating."
A state of emergency has spread to more than a quarter of the country after emergency decrees were declared in five more provinces on Sunday, bringing the total to 22. Violence erupted in the north and northeast, a Thaksin stronghold and home to just over half of Thailand's 67 million people.
Police in eastern Chonburi province said hundreds gathered overnight and were attempting to block a major port. A protest leader there threatened to set an oil tanker afire if the government moved on the Bangkok encampment.
Analysts and diplomats said the military had underestimated the resolve of Red Shirt protesters who have taken over a district of luxury hotels and shopping malls since April 3.