The demonstrators, wearing red shirts, returned fire with their own tear gas and firebombs. As many as 70 soldiers and protesters have been injured, according to local reports, including two soldiers and two civilians with gunshot wounds.
Earlier, the troubled Southeast Asian nation had declared a state of emergency.
In a radio address after the clashes, army Col. Sansern Kaewkamnerd said troops had intended to fire into the air but resorted to live ammunition in response to the firebombs thrown by the protesters, who also mobilized buses to block the troops. He said many protesters had been arrested.
The air was filled with smoke, tear gas and the wails of ambulances and firetrucks. In some places, fires burned out of control.
In a midnight address to the nation, Prime Minister Abhisit Vejjajiva appeared with army commanders to dispel rumors of a military coup. Thailand has had 13 military takeovers since abolishing absolute monarchy in 1932.
"I can confirm that the government and security agencies are still unified," he said. "You can see all the heads of the armed forces meeting with me right now."
Bangkok's streets remain filled with the "red shirts," supporters of former Prime Minister Thaksin Shinawatra. Thaksin, who was convicted of corruption and whose whereabouts are unknown, has called on Thais to rise up against the government in a "people's revolution."
More than 10,000 protesters continued to surround Government House and forced the closure of the Bangkok bus station, one of the busiest in Asia. The train station also was shut down Sunday, crippling transportation on the eve of Thai New Year. Roadblocks and groups of protesters were seen throughout central Bangkok. At least 14 countries have warned their citizens to stay away from Thailand.
Thaksin supporters also held protests in the north and northeast regions, where red shirts have blocked roads and seized government facilities. The state of emergency, declared Saturday, was extended to six provinces.
"This will hurt the country, but they have to fight to the end no matter what is lost," said Varaporn Rachoso, 50, a flower vendor in the northeastern city of Udon Thani. "Unless the police and army take off their uniforms and join the protest, there will be more blood."
Earlier, protesters had attacked the prime minister's motorcade with rocks and bottles.
The chaos across the capital caps a week of debilitating protests by Thaksin's supporters. As many as 100,000 protesters have swarmed into Bangkok since April 6. On Saturday more than 2,000 stormed a regional summit in Pattaya, forcing nine Southeast Asian heads of state to be evacuated by helicopter from rooftops.
The collapse of the summit delivered a black eye to Abhisit's 4-month-old government. In retaliation, authorities arrested the protesters' ringleaders and declared the state of emergency.
"I have to do this because the situation is out of control," Abhisit said in a televised address after the emergency declaration. He appealed for calm and said, "Everything will be all right."
Speaking by video link from an undisclosed location, Thaksin called for supporters to topple the government. He also played on police forces' alleged affinity for the so-called red shirts and promised that he would return.
"The troops who have already come out can come and join the red shirts to help us to get democracy for the people," he said. "This is a golden opportunity. We will make history and there will be no more coups in Thailand. We must achieve democracy for all of us."
The emergency decree suspends certain civil liberties, including the right to public gatherings and a free press. It also cleared the way for the government to call up military troops to tackle the protest mobs.
Top brass have denied rumors of a military coup and have emphasized that they will not initiate violence. Some of the protesters have no such reservations.
"The violence has begun already. It started today and will continue. It may do harm, but it must be done to protect democracy," protest leader Sakrebee Promchad, 49, said Sunday. "It must continue until we accomplish our goals. We will keep fighting."
Abhisit's motorcade was attacked Sunday after leaving the besieged Ministry of Interior. Protesters smashed one black BMW with rocks, bottles and outdoor furniture -- anything at hand. In one case, a protester picked up a heavy, potted plant and heaved it against the side of the sedan.
The prime minister managed to escape unharmed.
"I believe that the people have seen what happened to me. They have seen that the protesters were trying to hurt me and smash the car," Abhisit said on TV after the attack.
Abhisit, a 44-year-old Oxford-educated economist, was voted into office by parliament after his party came in second in 2008 elections. He promised to restore political stability to Thailand after a series of short-lived administrations linked to Thaksin, who was ousted in a bloodless coup in 2006. Thailand has had four heads of state and one interim military government since then.
Thaksin, a telecom billionaire, is in hiding from a two-year prison term for corruption. The Thai media have been awash in rumors of alleged sightings in Cambodia, the United Arab Emirates, and Africa. Last year, Britain revoked Thaksin's visa and, more recently, a consortium of Bangkok businesspeople offered a reward for anyone who could bring him back to face justice.
About $2.2 billion in funds held by Thaksin and his family reportedly have been frozen by the Thai government.
Still, Thaksin remains popular with the poor and marginalized rural majority.
McDermid and Kaewsangthong are special correspondents. Special correspondent Todd W. John contributed to this report.