* Army chief urges rivals to agree compromise solution
* Interim PM says caretaker government won't step down
* Both sides stuck to positions in first round of talks
* Security forces check for weapons (Add comment from caretaker prime minister)
By Amy Sawitta Lefevre
BANGKOK, May 22 (Reuters) - Thailand's military chief will press rival political factions on Thursday to end a drawn-out power struggle that has polarised the country and battered its economy, after neither side gave ground in a first round of army-brokered talks.
Army chief General Prayuth Chan-ocha declared martial law on Tuesday to prevent more violence between government supporters loyal to ousted former Prime Minister Thaksin Shinawatra and anti-government protesters backed by the royalist establishment.
Thailand's gross domestic product contracted 2.1 percent in January-March from the previous three months, largely because of the unrest, adding to fears it is stumbling into recession.
The army has rejected accusations that martial law amounts to a coup.
It has let rival protesters remain on the streets but banned them from marching to prevent clashes. It has also clamped down on the media, including partisan television channels, and warned people not to spread inflammatory material on social media.
Prayuth called on the two sides in closed-door talks on Wednesday to agree on a compromise that is likely to hinge around the appointment of an interim prime minister, political reforms and the timing of an election.
"I want to see every problem settled within this forum before I retire," the Nation newspaper quoted Prayuth as telling the rivals at a first round of talks on Wednesday. He is due to step down in September.
"I don't want my juniors to take up this job."
Wednesday's talks ended inconclusively with neither side backing down from their entrenched positions, participants said.
Leaders of the ruling Puea Thai Party and the opposition Democrat Party, the Senate leader and the five-member Election Commission joined a second round of talks at an army base in Bangkok on Thursday.
"The government wants the problem solved in a democratic way which includes a government that comes from elections," acting Prime Minister Niwatthamrong Boonsongphaisan told reporters.
Niwatthamrong, who was not attending the talks himself, added that his administration could not resign as its enemies are demanding as that would contravene the constitution.
Former telecommunications tycoon Thaksin has lived in self-exile since 2008 to avoid a jail term for graft, but still commands the loyalty of legions of rural and urban poor and exerts a huge influence over politics, most recently through a government run by his sister, Yingluck Shinawatra.
Yingluck was forced to step down as premier by a court two weeks ago, but her caretaker government remains nominally in power, despite the declaration of martial law and six months of sometimes violent protests aimed at ousting it.
"The administration is limited in its capacity to mobilise fiscal resources in order to stimulate economic growth, highlighting the importance of a resolution to ongoing political turmoil," Moody's Investors Service said in a report.
REFORMS OR ELECTION?
The instability stretches back to Thaksin's premiership, which began with a landslide election victory in 2001 - repeated in 2005 - and ended with his ouster in military coup on 2006.
The protesters say Thaksin is a corrupt crony capitalist who commandeered Thailand's fragile democracy, using taxpayers' money to buy votes with populist giveaways.
They want a "neutral" interim prime minister to oversee electoral reforms aimed at ridding the country of the Shinawatra family's political influence before any new vote.
The government and its supporters sees a general election that it would likely win as the best way forward and it has proposed polls on Aug. 3, to be followed by reforms.
Anti-government protest leader Suthep Thaugsuban, a former deputy prime minister in a government run by the pro-establishment Democrat Party, told his supporters victory was imminent.
"We will show our full strength on Friday, Saturday and Sunday. On Monday, prepare a candle each ... we will light them and announce our victory," Suthep told a rally near the U.N. regional headquarters in central Bangkok.
Thaksin's red shirt loyalists, rallying in Bangkok's outskirts, have warned of violence if the caretaker government is thrown out.
Twenty-eight people have been killed and 700 injured since this latest chapter in the power struggle between Thaksin and the royalist elite flared up late last year.
Both sides have armed activists in their ranks and the army is trying to prevent more weapons falling into their hands with a ban on the transport of arms and checks on roads.
"We now have three main checkpoints on major roads leading to Bangkok checking for weapons," Paradorn Pattanathabutr, a security adviser to the prime minister, told Reuters.
Life in Bangkok was going on largely as normal with no heavy troop presence. Paradorn said 10,000 police who had been deployed at protest sites had been taken off the streets. (Additional reporting by Juarawee Kittisilpa; Writing by Robert Birsel; Editing by Alan Raybould and Alex Richardson)