Tony Cheng, Al Jazeera's correspondent in Bangkok, said: "It's a major embarrassment to Thailand. They [the government] seem to be completely powerless to stop [the protests]."
"We've been seeing policemen putting on red shirts and coming here to join the rally.
"One wonders whether the prime minister does actually have control over the armed forces, he does appear to have lost control over the police," he said.
"The situation does seem to have calmed down considerably this evening."
Shinawatra, who was ousted in a 2006 coup, said on Sunday that he may return to Thailand and re-enter politics if the government clamps down on the opposition protests.
Protest leaders told Al Jazeera that they would continue their protests, seeking the resignation of Abhisit Vejjajiva, the prime minister.
"We're not challenging the declaration of emergency - what we're challenging is their [the government's] existence at the outset," Jakrapob Penkair, one of the leaders of the anti-government United Front for Democracy, told Al Jazeera.
"We see the government as ultimately illegitimate and illegal ... in other words the rule of law is now put in doubt and in question, so people must decide by themselves how to proceed with this."
The emergency decree bans gatherings of more than five people and forbids news reports that the government considers threatening to public order.
It also allows the government to call up military troops to quell unrest.
But bands of anti-government protesters, wearing red shirts, roamed parts of Bangkok and commandeered public buses in an attempt to block several major roads.
Tanks on streets
Abhisit declared the state of emergency in a televised speech.
"The government has tried all along to avoid violence but the protest has developed and they have used actions incompatible with the constitution," he said.
"Now the government is unable to avoid this state of emergency."
Soon afterwards, television reports said that about 50 protesters stormed into the interior ministry while Abhisit was in the building, but the prime minister escaped by car.
The Reuters news agency reported that soldiers initially made no effort to stop the protesters from entering the building, but later fired into the air to deter others from joining them.
Anti-government protesters gathered at the capital's police headquarters on Sunday.
Another crowd of demonstrators swarmed around Government House, the prime minister's office.
"Tensions are now running very high," Cheng said from the capital.
"There are now tanks on the streets of Bangkok," he said.
Major-General Suporn Phansua, a spokesman for the Bangkok Metropolitan Police, said that the protests have spread to many parts of the city.
"Protesters have seized tanks and armoured cars," he said.
Sathit Wongnogntoey, a minister in the prime minister's office, said the government had blocked broadcasts from the protesters' radio station in accordance with the emergency decree.
Earlier, police arrested Arisman Pongruengrong, who spearheaded Saturday's demonstrations in Pattaya.
Anti-government protesters broke into the summit venue of a meeting of the Association of Southeast Asian Nations (Asean), on Saturday.
Asean leaders were airlifted from the summit venue after protesters breached police lines outside the building.
The abandoned summit - the biggest international gathering since the G20 summit in London earlier this month - grouped the Asean nations with China, Japan, South Korea, India, Australia and New Zealand.
The collapse of the summit puts more pressure on Abhisit, who has pledged that his four-month-old government will heal years of political turmoil since Thaksin was forced from power.
Thaksin's supporters say Abhisit, whose coalition government came to power four months ago, became prime minister illegitimately after a parliamentary stitch-up engineered by the army.
Four prime ministers in the last 15 months have failed to resolve Thailand's deep political rift which pits the military and business elite against a rural majority loyal to Thaksin.