Labour Minister Chalerm Yubumrung said the measure would take effect from today.
The emergency decree greatly expands the power of security forces to issue orders and search, arrest and detain people, with limited judicial and parliamentary oversight. Protesters have been demanding the resignation of prime minister Yingluck Shinawatra.
The state of emergency is due to continue for 60 days.
The protesters want Ms Yingluck to make way for an appointed government to implement reforms to fight corruption.
She called elections on February 2 but the protesters are insisting they not be held.
The state of emergency follows increasing attacks at protest sites for which the Government and protesters blame each other. These include grenades thrown in daylight and drive-by shootings. On Sunday, 28 people were wounded when two grenades were tossed at one of several protest sites set up at key Bangkok road junctions.
Another grenade attack on a protest march on Friday killed one man and wounded dozens.
No arrests have been made in either attack.
Nine people have been killed and hundreds hurt in violence since the protests began in early November. The protesters escalated their tactics this month with a threat to shut down the capital to prevent the government from functioning.
Protest leader Suthep Thaugsuban, in a speech to followers, questioned whether the state of emergency was justified, saying the demonstrators were peaceful.
He told an enthusiastic crowd of several hundred at a park in Bangkok city centre. "Is it right for them to use the emergency decree to declare a state of emergency to come and deal with us? Come and get us." Thousands more are camped at other locations in the capital.
The official announcement of the emergency decree said the elec-tions would proceed as planned on February 2 even though the opposition Democrat Party, closely aligned with the protesters, is boycotting the polls.
The protesters claim Ms Yingluck's government is carrying on the practices of Thaksin Shinawatra, her billionaire brother who was prime minister from 2001 to 2006, by using the family fortune and state funds to influence voters and cement its power.
Mr Thaksin was ousted by a military coup in 2006 after street protests accused him of corruption and abuse of power. He fled into exile in 2008 to avoid a two-year prison sentence for a conflict of interest conviction.
Deputy prime minister Surapong Tovichakchaikul said: "The protesters have constantly violated the law, especially in closing down government offices and banks and harassment against civil servants to prevent them from working."
He said Mr Suthep's group had gone overboard and attacks were carried out by ill-intentioned people who were affecting the country's stability.
He added: "I insist the Government will adhere to international standards, using neither force nor weapons in cracking down on protesters."