The government had threatened to cut off power and water supplies to the Rajprasong neighbourhood of Bangkok, where the demonstrators are massed, if the protesters did not disperse by midnight local time (1700 GMT) on Wednesday.
That deadline came and went, but supplies are still available and the protesters unmoved after the deadline had passed.
The plan to choke off essential services to the demonstrators was put on hold because of the repercussions it would have on other residents, which include foreign diplomats, Sansern Kaewkamnerd, the spokesman for an agency in charge of suppressing the protests, said late on Wednesday.
Al Jazeera's Aela Callan, reporting from Bangkok, said: "It is looking increasingly like a bad situation for both sides, who both look increasingly desperate.
"The government is looking increasingly weak and the red shirts have painted themselves into a corner as there is little they can do now to have a peaceful situation," she said.
"It is looking increasingly like both sides now do not want to go back to the negotiating table. The red shirts have called for reinforcements to the rally site and the government looks like it is making decisions on the run."
Callen said that sending troops into the protest area to remove the demonstrators would cause a "bloodbath", with the mainly rural poor red shirts promising to fight to the death.
Korbsak Sabhavsau, the prime minster's secretary-general, said on Thursday that the government would not carry out elections as part of a peace deal with the so-called red shirt protesters until the demonstrations ended.
"It's clear that the red shirts have only verbally accepted to join the reconciliation roadmap but have not agreed to end the protests," Korbsak told the AFP news agency.
"Therefore it's impossible to hold elections as proposed."
The red shirts have said that they are not leaving until Suthep Thaungsuban, the deputy prime minister, is charged for his alleged role in a deadly crackdown on protesters on April 10.
They have held protests since March 12 calling for the dissolution of parliament and fresh elections.
The demonstrations have often brought parts of central Bangkok, the capital, to a standstill for long-periods and have included clashes with police, leaving 29 people dead and 1,400 injured.
"[Abhisit Vejjajiva], the prime minister, has said that if today everyone, including the government, can work freely and travel freely without disruption then there can be elections, but the situation is making no progress," Korbsak said.
"As there is no election, there is no need for house dissolution."
A deal on an amnesty for both sides could be the main sticking point for a successful reconciliation deal. Arrest warrants have been issued for many of the red shirts' chief leaders.
The red shirts initially called for immediate elections but agreed to a reconciliation deal this month in which Abhisit offered to dissolve parliament in the second half of September and hold polls on November 14.
They have said that the government is backed by the military and came to power undemocratically, via a 2008 parliamentary vote following a court ruling that ousted Thaksin Shinawatra, the former prime minster who is linked closely to the protesters.
Nattakorn Devakula, a political analyst, told Al Jazeera: "The red shirts did not take the offer [for November elections] which puts them into a very cornered, perhaps desperate, situation.
"At this point the red shirts have to take some sort of an offer otherwise it is going to push the government to take a harsh hand."