By Amy Sawitta Lefevre
BANGKOK (Reuters) - Thai Prime Minister Yingluck Shinawatra suffered a blow on Wednesday when a court knocked back a constitutional amendment that could have strengthened her party's legislative grip, a ruling that could cool tension that was close to boiling over.
Thailand's Constitutional Court said moves to change the composition of the Senate were flawed, but stopped short of dissolving Yingluck's ruling Puea Thai Party for fraud after several lawmakers had proxies cast their electronic votes for them during a September 28 house session.
The decision is the latest setback for Yingluck's government after the Senate last week rejected an amnesty bill that critics say was designed to whitewash the crimes of her influential, self-exiled brother, former premier Thaksin Shinawatra, to clear him to return home.
Nearly half of the members of the Senate are appointed and the proposed changes involved scrapping appointed senators to create a larger, fully elected chamber. But the judges ruled that the proposal would have allowed family members of existing lawmakers to win seats.
Yingluck's party dominates the elected lower house of parliament but has been unable to use its electoral strength to control the Senate fully.
Pro- and anti-government groups had mobilized supporters at opposite ends of Bangkok in anticipation of the verdict, which was closely watched by investors concerned a ruling party dissolution would anger Thaksin's supporters.
Thailand's benchmark index index has fallen almost 5 percent from a high of 1,484.72 set on October 18 amid worry over political tension, which has seen the baht currency weaken 1.8 percent this month. Sentiment is expected to improve.
"The Puea Thai Party has learned a hard lesson both in terms of the amnesty bill and the proposed charter changes," said Kampon Adireksombat, an economist at Tisco Securities.
"The government is likely to keep a low profile to recover."
The protests have brought Thailand's intractable political divisions back to the surface after two years of relative calm.
Outrage over the proposed amnesty mobilized many urban, middle-class supporters of the royalist "yellow shirt" movement that undermined two governments loyal to the populist former telecoms tycoon Thaksin in the past.
"ROUND TWO" UNDERWAY
Some analysts believe the amnesty and constitution amendment push, both seen as moves orchestrated by Thaksin to consolidate his power for years to come, could be used by both his allies and his enemies to advance their interests.
"Emotions are high in Bangkok and it's clear both camps are prepared to go beyond the point of no return," said Boonyakiat Karavekphan, a political analyst at Bangkok's Ramkhamhaeng University. "What this means is unclear, but some may stay on the streets until they run out of steam."
Though the Senate rejected the amnesty, it did little to placate anti-government protesters. Their leader, Suthep Thaugsuban, a former opposition party heavyweight, last week told a 50,000-strong crowd to keep up the momentum and "uproot the Thaksin Shinawatra regime".
Thaksin won two sweeping election victories but was ousted in a 2006 coup. He remains divisive, idolized by millions of urban and rural poor but reviled by the royalist establishment and members of the urban middle class who chafe at the prospect of his return to office.
Though some of Thaksin's supporters also objected to an amnesty that would have cleared those involved in a 2010 military crackdown on them, that killed scores, most are firmly behind the ruling party they elected in a 2011 landslide.
"We stand by this government and will do whatever it takes to protect it," Nattawut Saikua, a pro-Thaksin leader, told 20,000 protesters at a Bangkok soccer stadium on Wednesday.
"The court's decision rang the bell for the next round in the fight between different factions."
(Additional reporting by Pracha Hariraksapitak and Viparat Jantraprap; Editing by Martin Petty and Robert Birsel)