Thaksin, who was ousted in a 2006 coup, said on Sunday that he may return to Thailand and re-enter politics if the government moves to crack down on the opposition protests.
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.
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 ... the rule of law is now put in doubt and in question, so people must decide by themselves how to proceed with this."
In a televised speech, Abhisit declared the emergency banning gatherings of more than five people, forbidding news reports that the government considers threatening to public order and allowing it to call up military troops to quell unrest.
"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.
Following Abhisit's announcement, the government sent tanks onto the streets of the city.
The army, navy and air force were also deployed to ensure the security of public buildings, junctions and transport hubs at 50 spots in Bangkok, colonel Sunsern Kaewkumnerd told the AFP news agency.
It was the third time that a state of emergency had been imposed in the last eight months.
Earlier, anti-government protesters had gathered at the capital's police headquarters and swarmed around Government House, the prime minister's office.
Major-General Suporn Phansua, a spokesman for the Bangkok Metropolitan Police, said protesters had also seized tanks and armoured cars.
Delegates from the Association of Southeast Asian Nations (Asean) and China, Japan, South Korea, India, Australia and New Zealand, had to be airlifted from a meeting in Bangkok a day earlier after protesters broke into the summit venue.
The collapse of the summit - the biggest international gathering since the G20 summit in London earlier this month - has put more pressure on Abhisit, who had pledged that his four-month-old government will heal years of political turmoil since Thaksin was forced from power.
Thaksin's supporters allege Abhisit, whose coalition government came to power four months ago, became prime minister under an illegitimate parliamentary deal 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.