* Stocks fall 2.3 percent, hit lowest since Jan 2007
* Baht hits one-year low, central bank steps in
* Government bonds seen as safe haven with inflation peaking (Updates with closing stock market prices)
By Orathai Sriring
BANGKOK, Sept 2 (Reuters) - Thai stocks hit a 19-month low and the baht touched a one-year trough on Tuesday after the prime minister imposed emergency rule, but domestic government bonds rose as local investors sought safe haven for their funds.
Shares in the tourist sector took a hit after foreigners cancelled flights when some countries issued travel warnings, although Thai Airways (THAI.BK) rallied in late trade.
The benchmark SET index .SETI ended down 2.3 percent at 659.51 after touching 655.62, its lowest since January 2007. The market has lost 24.7 percent since street protests began on May 25.
Thai Prime Minister Samak Sundaravej declared a state of emergency in Bangkok on Tuesday and gave the army control of public order after a man died in overnight clashes between pro- and anti-government protesters. [ID:nSP172153].
"Announcing a state of emergency is proper and timely. But if you ask me if this is the beginning of the end? No, it isn't," said Puwadol Lapudomsuk, a senior strategist at Asia Plus Securities, adding he expected a gradual fall, not panic selling.
Kosin Sripaiboon at UOB KayHian Securities felt the same.
"Selling will be coming from both sides, foreign and local investors, but I don't really think panic selling will be as bad as when the former government imposed a 30 percent capital control measure," he said, referring to the record one-day fall of 14.8 percent in reaction to capital controls in December 2006.
Bourse chief Patareeya Benjapolchai remained calm. "The circuit breaker system will work automatically if the market falls sharply to a certain point but right now everything is manageable," he said.
The baht THB=TH was weaker, in line with other Asian currencies, at 34.49 per dollar in late trade after hitting a one-year low of 34.52.
The Bank of Thailand said it had intervened in the market to support the currency.
"The baht had weakened rapidly this morning, so we had to take care of it. If it is volatile, we will step in," Deputy Governor Atchana Waiquamdee told reporters.
Investors in Thailand's dollar-denominated bonds have taken fright at the political crisis, with anti-government supporters occupying the prime minister's official compound, but domestic bonds continued their recent strong run.
"Political noise reduces the attractiveness of risky alternatives to safe-haven government bonds," ING analyst Tim Condon said in a report.
The 10-year domestic bond yield TH10YT=RR shed 5 basis points to 4.45 percent bid. It has fallen around 180 bps from a June peak as investors took the view that both inflation and interest rates have peaked.
But five-year credit default swaps (CDS) THAILD5UA=GFI -- the cost of protecting against a default in Thailand's dollar-denominated debt -- widened by as much as 10 bps to 150.
The CDS later tightened to 146 bps, a Hong Kong trader said, meaning it would cost investors $146,000 to protect against $10 million of sovereign debt annually for five years.
On the stock market, shares in national carrier Thai Airways (THAI.BK) bounced back to end 4.4 percent higher at 14.30 baht after hitting a record low of 13.30 baht.
The national carrier's president said passengers were cancelling due to the unrest, but the share was helped by late bargain-hunting and another drop in fuel prices, dealers said.
Airports of Thailand (AOT.BK) was down 1.3 percent at 37 baht. Several airports were closed by protests at the end of last week but have now reopened.
Among big losers, top energy firm PTT (PTT.BK) fell 4.6 percent and market leader Bangkok Bank (BBL.BK) dropped 3.4 percent. LINKS > More stories on Thailand's political turmoil [ID:nBKK69595] ($1=34.43 Baht) (Additional reporting by Rafael Nam in Hong Kong, Kevin Yao in Singapore, Ploy Chitsomboon and Viparat Jantraprap in Bangkok; Editing by Alan Raybould)