The decision, reached at a special cabinet meeting of selected ministers and National Security Council chiefs, means four districts of Songkhla and Mae Lan district in Pattani are still covered by the ISA, while the rest of Pattani and the other southernmost border provinces of Narathiwat and Yala remain under the more draconian emergency decree.
Deputy Prime Minister Chalerm Yubamrung, who was in the meeting, said the prime minister had ordered a thorough study of the possibility of lifting the emergency decree in other districts of Narathiwat, Pattani and Yala and replacing it with the ISA.
The government should impose the decree in as few areas as possible in the southern border region, the prime minister was quoted as saying.
She did not expect the government would come under pressure from the Organisation of Islamic Cooperation (OIC) over this decision, she added.
Ms Yingluck will now more involved with the southern issues, including takoing a closer look at the budget used to fight militants and restore peace in the region, and is giving additional roles for Defence Minister ACM Sukumpol Suwanatat in overseeing security affairs.
ACM Sukumpol was appointed to the new tasks on Wednesday.
The districts under the ISA are Na Thawee, Saba Yoi, Thepha and Chana of Songkhla and Mae Lan in Pattani.
Thailand is at odds with the OIC, which reported it sees no progress in how the government is tackling unrest in the deep South at its foreign ministers meeting in Djibouti on Nov 15-17, where Thailand was an observer.
Vice foreign minister Jullapong Nonsrichai. who attended the meeting, said he was disappointed with the OIC secretarial office's use of the word "meagre"' to describe the progress in the Thai government's efforts to resolve the southern conflict.
Foreign Minister Surapong Tovichakchaikul said on Thursday he will give a letter to OIC Secretary-General Ekmeleddin Ihsanoglu on Saturday, reaffirming the government's intention to cooperate with the OIC in seeking a lasting peace in the southernmost provinces.
Mr Ihsanoglu will make a stopover at Suvarnabhumi airport on his way to Brunei.