* Thai army declares martial law, but says not a coup
* Baht pares losses; intervention suspected
* Benchmark stock index slides 1 percent
* Analysts say 'bad news' priced in By Jongwoo Cheon and Satawasin Staporncharnchai
SINGAPORE/BANGKOK, May 20 (Reuters) - Thai stocks and the baht currency slid on Tuesday after the army imposed martial law in a bid to restore stability after months of protests left the country without a properly functioning government.
But analysts did not expect a significant exodus of foreign funds unless violence escalates and threatens further damage to Southeast Asia's second-largest economy.
The army denied that it was staging a military coup and a caretaker government remained in office.
The baht fell as much as 0.5 percent to 32.62 per dollar in early trade. It later pared most of those losses and was quoted at 32.48 as the central bank was suspected of intervening to support the currency, traders said.
Thailand's main share index lost around 1 percent, while the five- and 10-year government bond yields rose.
"The near term bias is for further USD/THB strength, with 32.85/95 some initial upside targets to think about," said Jonathan Cavenagh, senior FX strategist with Westpac in Singapore, referring to the dollar/baht pair.
The Thai currency is expected to remain an underperformer against the likes of the Malaysian ringgit and the Philippine peso, Cavenagh said.
The economy shrank more than expected in the first quarter as anti-government protests dragged on, adding to concerns the country is sliding into recession.
The Thai bond market has seen 51.1 billion baht ($1.6 billion) of outflows so far this year, even though foreigners have bought a combined net 19.6 billion baht in bonds, according to Thai Bond Market Association.
In the stock market, foreign investors have sold a combined net 7.5 billion baht so far this year, according to exchange data.
Yet, the main index is still up more than 7 percent so far this year.
Analysts said some investors may be looking to buy Thai assets on dips.
Thailand's government bonds have been thriving on gloomy economic and political headlines as investors line up to buy baht-oriented debt.
"We expect interest rates will remain low, especially as the strengthening current account insulates THB from external pressures," Citigroup said in a research note, referring to the baht.
"We continue to advise clients against being short THB. By minimizing violence, martial law could limit the impact on the critical tourism sector. The current account improvement may then outstrip potential capital outflows."
Thailand reported a combined $8.2 billion current account surplus in the first three months of the year.
Thai assets have already priced in the prolonged political unrest, analysts said.
Last year, foreigners dumped a net 194.7 billion baht in Thai stocks and bond market suffered 942.0 billion baht ofoutflows.
"Even if the bias is for equities to weaken we could still see bargain hunters support the market," Westpac's Jonathan said.
"A fair degree of 'bad news' already priced into the outlook." ($1 = 32.45 Baht) (Editing by Kim Coghill)