The demonstrators, loyal to ousted premier Thaksin Shinawatra, said Prime Minister Abhisit Vejjajiva would face mounting protests unless he gives in.
They descended on a military barracks in Bangkok where the government was meeting, which prompted the military to boost troop numbers and prepare evacuation plans.
Dressed in pro-Thaksin red, the peaceful protestors massed in front of the 11th infantry army barracks on Bangkok's northern outskirts to press their demand for Mr Abhisit to dissolve parliament (by 5am Irish time).
However, in a nationally televised address from the barracks, where ministers and military commanders are gathered, Prime Minister Abhisit Vejjajiva said 'the coalition parties agree the demand cannot be met'.
'Elections must be held under common rules and genuine calm. We have to listen to other people's voices, not just the protestors,' he added.
The Red Shirts, many from poor and rural northern areas, are loyal to the former prime minister, who was ousted in a coup in 2006 and is living abroad to avoid a jail term for corruption.
Mr Thaksin addressed the crowd from an undisclosed European location by video link late last night, urging his supporters to press on.
Mr Abhisit left the army base by helicopter immediately after his televised announcement, saying he wanted to inspect the city traffic, snarled up by the moving rally.
At least 86,000 protestors have been gathered since Saturday at a city centre rally site.
Soldiers and riot police have been deployed at the site under a strict security law that allows authorities to ban gatherings and impose curfews.
In total, authorities said, a 50,000-strong security force is on hand across Bangkok and surrounding provinces.
Protest leader Veera Musikapong said they would slowly return to the main rally ground close to government offices after Mr Abhisit refused their demands, and leaders would meet to plan their next move.
