* Protest leader calls for ceasefire, U.N. talks
* Govt response: no conditions, leaders surrender
* Government backs off threat to impose curfew
* Red shirts gather at new rally site
* Death toll at 29; 221 wounded, including 6 foreigners (Recasts with new details throughout)
By Jason Szep and Ambika Ahuja
BANGKOK, May 16 Thailand took a tough stand against thousands of anti-government protesters on Sunday, rejecting demands for U.N.-supervised talks and calling on their leaders to surrender after deadly clashes with troops.
Hardline comments from the Thai government doused hopes of a compromise to end three days of chaotic fighting that has killed at least 29 people, all civilians, and wounded 221, trapping residents in homes and raising the risk of a broader conflict.
Nattawut Saikai, a protest leader, called for a ceasefire and U.N. moderated talks. "We have no other condition. We do not want any more losses," he told supporters.
But the government swiftly dismissed the offer. "If they really want to talk, they should not set conditions like asking us to withdraw troops," said Korbsak Sabhavasu, the prime minister's secretary-general.
As fighting raged in two areas of the city of 15 million people, residents hoarded food at supermarkets, stayed indoors or fled to escape neighbourhoods transformed into battlegrounds.
"Rejection of any ceasefire talk is very ominous," said political scientist Vienrat Nethito at Chulalongkorn University. "This pretty much guarantees fighting will continue and the city will be even closer to the brink of civil war."
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The most severe fighting took place in the Bon Kai area of Rama IV, a major artery to the business district. Troops and snipers fired semi-automatic weapons as protesters hurled petrol bombs and burned walls of kerosene-soaked tyres to camoflauge themselves.
One protester was shot in the head by a sniper, a Reuters witness said. By afternoon, as clashes intensified, a grenade was tossed at troops, who responded with gunfire, the witness said.
Some wounded protesters were taken to hospital on the back of motorcycles, witnesses said, as medical rescue workers were either blocked by the military or too scared to enter the scene of clashes after two medical workers were killed in the clashes.
Government spokesman Panitan Wattanayagorn called on protest leaders to surrender and end the protest immediately. "We will move forward. We cannot retreat now," Prime Minister Abhisit Vejjajiva said in a televised statement, encapsulating the government's mood.
Monday and Tuesday were declared public holidays, but banks and financial markets would remain open.
Analysts and diplomats said the military appears to have underestimated the resolve of thousands of protesters barricaded in district of luxury hotels and shopping malls for six weeks.
Some women, children and the elderly are trickling into a nearby Buddhist temple for safety. The government is seeking cooperation with protest leaders to dispatch Red Cross workers and other human rights volunteers to persuade people to leave.
"We will not flee," Jatuporn Prompan, a protest leader, told supporters in their 3.5 sq-km (1.2 sq-mile) main protest site where at least 5,000 remain, including women and children, are barricaded behind walls of tyres, poles and concrete.
Abhisit briefly threatened to impose a curfew, a rare and jarring event for a city known for raucus nightlife, saying it could help isolate the area.
The mostly rural and urban poor protesters, supporters of ousted premier Thaksin Shinawatra, accuse the military-backed government of colluding with the royalist elite and meddling with the judiciary to bring down previous Thaksin-allied governments.
The government declared a state of emergency in five more provinces as fighting showed signs of spreading to the north and northeast, a Thaksin stronghold home to just over half of Thailand's 67 million people.
In Ubon Ratchathani province, protesters burned tyres on several roads. One group tried to break into a military compound but were forced back by warning shots into the air. Emergency decrees are now imposed in 22 provinces.
Thousands of protesters were massing in a separate area in working-class Klong Toey area near the fighting on Rama IV. A new protest site would vastly complicate attempts to end the protests and resolve a crisis that has battered the economy.
Five journalists have been shot, though one escaped unwounded because the bullet deflected off his flak jacket.
As Bangkok braced for more unrest, many residents hoarded food and other supplies from grocery stores.
"We don't know how much longer this nightmare is going to last and how far it will spread," said Panna Srisuwan, a Bangkok resident waiting in line at a supermarket. "I am stocking up for the rest of the week."
Witnesses said the bloodshed has been largely one-sided, as troops armed with automatic rifles easily dodge projectiles and open fire with automatic weapons. Some protesters have been killed by snipers positioned on the tops of office towers.
Soldiers can shoot if protesters come within 36 metres (120 ft) of army lines, said army spokesman Sansern Kaewkamnerd, adding more soldiers were needed to establish control.
The government insists that some of the protesters are armed with grenades and guns and showed footage on national television in an attempt to bolster their case.
Many protest leaders now face terrorism charges that carry a maximum penalty of death, raising the stakes in a two-month crisis that has paralysed parts of Bangkok, stifled Southeast Asia's second-biggest economy and decimated tourism.
The government's strategy of starving protesters out of their encampment was shows signs of having an effect. Supplies of food, water and fuel were starting to run thin as the red shirt delivery trucks were being blocked.
But they said they still had enough to hold out for days.
Before fighting began on Thursday with the shooting of a renegade general allied with the protesters, the two-month crisis had already killed 29 people and wounded about 1,400 -- most of whom died during an April 10 gun battle in Bangkok's old quarter. (Additional reporting by Ploy Ten Kate, Damir Sagolj, Jerry Lampen, Panarat Thepgumpanat and Martin Petty; editing by Bill Tarrant)