* Offer comes after six weeks of protests
* Gen. Anupong says crackdown would do more harm than good
* Indonesia says concerned about regional impact
* U.S. and UN urge restraint from both sides (Recasts, adds analyst comment)
By Jason Szep
BANGKOK, April 23 Protesters and the Thai government stepped back from the brink of all-out armed conflict on Friday as both sides offered hints of compromise a day after deadly grenade attacks hit Bangkok's business district.
The red-shirted supporters of ousted former premier Thaksin Shinawatra said they will end a three-week occupation of Bangkok's ritzy shopping district if the government dissolved parliament and called elections in 30 days instead of immediately.
It's unclear whether the military-backed government of embattled Prime Minister Abhisit Vejjajiva would agree to that timetable, though analysts say he's running out of options after weeks of unrest by protesters who have gained a clear upper hand.
"The government might have to agree to a three-month timeframe, but this doesn't mean this will ease the tensions," said Pitch Pongsawat, political scientist at Chulalongkorn University. "There doesn't seem to be any real control about what's been happening on the streets."
The risk of violence remains high. Thousands of armed troops keep watch over red shirts at a city intersection. Royalist pro-government protesters often gather outside their barricade, sparking clashes in which both sides hurl bottles and insults. <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
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Among their new demands, the red shirts want Abhisit to begin an independent probe into a clash that killed 25 people and wounded more than 800 in a failed attempt to disperse the protesters on April 10, and said troops must withdraw from areas around their protest site.
"The government must stop all threats against our movement," Weng Tojirakarn, a red shirt leader, said from a stage at their protest site in the heart of Bangkok's commercial district.
The demands came shortly after army chief Anupong Paochinda offered an olive leaf of his own, telling commanders there would be no crackdown on the protesters camped out in the capital because it would do more harm than good.
'FULL SCALE WAR'
Tens of thousands of red shirts remain in a fortified encampment at a district of high-end department stores in central Bangkok, vowing to stay until parliament is dissolved.
Some doubt a shorter timeline for elections would end the increasingly violent conflict on Bangkok's streets.
A powerful backlash against against the mostly rural and working-class red shirts is growing among Bangkok's royalist establishment who took to the streets on Friday holding placards reading "no dissolution."
The 20,000 protesters gathered near Abhisit's office, saying they were fed up with the disruption from the red shirts.
If Abhisit caves in, those royalists who believe the red shirts want to topple Thailand's monarchy are likely to fight back with a vengeance. In 2008, they blockaded Bangkok's international airport, stranding at least 230,000 people until a court dissolved a pro-Thaksin ruling party for electoral fraud.
Thursday's blasts also indicate a new tactic that one analyst likened to urban terrorism. The blasts killed one person and wounded 88, including an American, Australian and a Japanese. The government revised down an earlier toll of three dead.
The violence and deepening political divide has spurred talk of civil war in Southeast Asia's second-biggest economy.
"The government is far from controlling the situation," Thailand's top broker Kim Eng Securities said in a client note. "These powerful explosions right in the army-barricaded area demonstrate they are well-prepared to wage a full-scale war."
Indonesian Foreign Minister Marty Natalegawa offered his Thai counterpart, Kasit Piromya, on Friday "any assistance" for a dialogue between the conflicting parties, noting the troubles could have a contagious impact in the region.
U.N. Secretary-General Ban Ki-moon appealed to both sides to avoid further violence, while U.S. State Department spokesman Philip Crowley called for restraint.
IGNITING THE BARRICADE
Violence nearly flared on Friday morning when police demanded the red shirts dismantle their fortress-like barricade of tyres, bamboo poles and chunks of concrete near the business district. The police pulled back after red shirts poured fuel on the tyres and threatened to ignite the entire barricade.
Analysts say the protests are radically different from any other period of unrest in Thailand's polarising five-year political crisis -- and arguably in modern Thai history, pushing the nation close to an undeclared civil war.
Diplomats and analysts say the middle ranks of the army look dangerously split with one faction throwing its weight behind the protesters, led by retired generals allied with Thaksin, who was ousted in a 2006 coup and later sentenced in absentia to two years in prison for corruption.
The red shirts say British-born and Oxford-educated Abhisit came to power illegitimately in December 2008, heading a coalition the military cobbled together after courts dissolved a pro-Thaksin party that led the previous government. (Additional reporting by Martin Petty. Editing by Bill Tarrant)