The Emergency Powers Law, passed on Friday, replaces localised martial law already in place in the three southern most provinces, Narathiwat, Pattani and Yala, where more than 800 people have died in the past 19 months.
"In the past seven days there have been signs that the situation will escalate," Deputy Prime Minister Wissanu Krea-ngam said after an emergency cabinet meeting prompted by a coordinated set of attacks on Thursday evening in the provincial capital of Yala.
"The last straw that prompted us to impose this law is what happened at 7pm (1200 GMT) in Yala," he said.
Bombs set off
In one of the most dramatic episodes of the southern unrest, suspected Muslim separatists set off a series of bombs, bringing down pylons outside electricity sub-stations and plunging the town into darkness for an hour.
Two policemen were killed and 23 people injured in the ensuing shooting in the normally quiet town, home to 30,000 people and situated 1100km south of Bangkok near the Malaysian border.
The new laws will seek to curb
rising violence in the south
The new law allows Thaksin to stop the sale of newspapers and magazines deemed "threatening to national security or causing public anxiety", according to a draft seen by Reuters.
Earlier this year the Thai government was criticised by a local human rights body for its handling of a protest last year in which many Muslim demonstrators died.
Security forces mistreated protesters at the town of Takbai and their methods were ill thought-out, the National Human Rights Commission reported.
Most of the 85 protesters who died at Takbai suffocated when they were loaded on to a truck.