Boyce said the junta had backed off from proposals to impose strict capital controls on foreign investors but the government had stirred up controversy by proposing caps on foreign ownership of Thai companies and saying it would strip key drugs of their patent protection and give away generic versions.

The health ministry said it would make generic versions of the drugs to distribute to people too poor to pay for the branded versions.

"Thailand did it without any consultation," Boyce said. "There is this notion that the drug companies are evil."

Boyce described the move on prescription drugs as one of several steps that had roiled investor confidence in the junta. Capital controls, announced but not implemented, was another.

Despite political instability, Thailand with its well-regarded workforce, fairly low costs, good infrastructure and a location in the heart of fast-growing Southeast Asia remains attractive to multinational businesses.

Boyce, who stopped in San Francisco this week to address a meeting called by the California-Asia Business Council and San Francisco company Lombard Investments, said Ford Motor had decided to build a US$1-billion (Bt35-billion) manufacturing plant in Thailand.

Boyce also said advanced negotiations to craft a bilateral US-Thailand free-trade agreement had been put on hold.

"We went through several rounds of negotiations," said Boyce, who has been Washington's man in Bangkok for two years.

Pact opponents "put together emotional demonstrations and said free trade with the US was antithetical to Thai interests".

Boyce disagrees. "In the history of the world, no small country has ever not benefited from a free-trade deal with the United States."

US business leaders warn that Thailand's decision to strip pharmaceuticals of patent protection could slow the inflow of foreign capital. Americans had $7.7 billion of investments in Thailand in 2005, according to the US Trade Representative's office.

"Investors look at potential destinations and judge how well intellectual property is protected when they decide to put capital in those countries," Daniel Christman, senior vice president of the US Chamber of Commerce, said in Bangkok last week.

"The vast majority of companies surveyed by us have expressed serious concerns about the future investment climate in Thailand."