Generals from Thailand and Cambodia met yesterday in an effort to prevent the tension between their two countries escalating into military conflict, as the political spat surrounding the controversial figure of Thaksin Shinawatra gathered pace.

Thailand demanded that the Cambodian authorities arrest the ousted former Thai Prime Minister, but the extradition request was immediately refused.

The Thai Prime Minister, Abhisit Vejjajiva, insisted that his Government would resubmit documents calling for the handover of Mr Thaksin, who is in Phnom Penh as the newly appointed “economic adviser” to Cambodia’s Prime Minister, Hun Sen. The first request was rejected on the grounds that the two year sentence for corruption imposed upon Mr Thaksin is politically motivated.

“There will be no extradition,” Mr Hun Sen said at a press conference, standing alongside Mr Thaksin.

“Some leaders have been toppled during times of provocation but Thaksin was toppled during a time he was on a mission for his nation. So he is a political victim of the coup d'etat of 19 September, 2006.”

A letter from the Foreign Ministry rejecting the request said: “Cambodia considers the prosecution and legal process against His Excellency Mr Thaksin Shinawatra as a politically motivated proceeding … he was OVERWHELMINGLY and DEMOCRATICALLY elected by the Thai people … Taking into consideration absolute realities ... Cambodia is not in a position to make the provisional arrest for the purpose of extradition.”

Mr Abhisit threatened to freeze further joint projects between the two countries, following the cancellation of an agreement on joint undersea energy exploration. He also announced restrictions on traffic between the two countries, a busy border across which a flourishing two way trade operates.

“The Thai Government will review more mutual co-operations following the incident,” he said. “We will restrict more on border crossing to prevent people from crossing to gamble in casinos on the Khmer soil.”

The deputy supreme commander of the Cambodian armed forces, Jai Dara, met with Lieutenant General Veevarit Chornsamrit of the Thai Army in an effort to maintain relations between the two military establishments which have fought deadly skirmishes along their border. “If the war really breaks out, Thailand will be the winner,” General Veevarit said.

Suthep Thaugsuban, the deputy Prime Minister of Thailand with responsibility for national security, said: “It would not be fun to get into another fight, because there would be casualties. War is a thing we must try to avoid. All this is happening because Thaksin is using Cambodia as his base for political operations. As he is a former Prime Minister he should know what is right or wrong, and should not hurt Thailand the way he is doing.”

Mr Thaksin was elected three times as Thailand’s Prime Minister, but was forced from power in a military coup in 2006 after months of vociferous demonstrations against him. He has lived in exile for most of the time since then, and last year he was sentenced to two years in prison for misuse of power over a corrupt property deal involving his ex-wife.

His visit to Cambodia has provoked rage in Thailand, compounded by an interview which he gave to The Times, in which he referred to the royal succession which will follow the death of Thailand’s king, Bhumibol Adulyadej. On Tuesday a group of Thai politicians and generals brought a formal complaint of lèse majesté or insulting the royal family, against Mr Thaksin, a crime punishable by up to 15 years in jail.

His presence in Cambodia, the closest he has been to Thailand since fleeing prosecution, is deeply uncomfortable for the Thai Government, and rousing for Mr Thaksin’s many supporters.

Mr Suthep said: “We must tell the world community that we love peace and want to maintain friendship with neighbouring countries. But the Government of the neighbouring country happens to accommodate the one who is hurting our country, hurting our people and hurting our [royal] institution. We must speak out.”

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