He said the idea was "favoured mostly by outsiders", whereas locals do not want a special administration zone, he said.
The special administration idea has been floated by former premier Chavalit Yongchaiyudh. There are currently two special administration zones in Thailand _ Bangkok and Pattaya.
Gen Prayuth said they were created because they are major urban centres with a large number of tourists.
"New administrative structures require a new form of management and budget," he said. "I don't think the far South is ready in terms of budget."
Furthermore, Gen Prayuth said there was no indication the army had been on the wrong track in its efforts to tackle the southern problems.
He said law enforcement in the region is strong as part of the ongoing peace process between the government's National Security Council (NSC) and the Barisan Nasional Revolusi (BRN) separatist group.
Gen Prayuth said dialogue was necessary to solve problems in the violence-plagued region. It does not hurt to keep on talking and ironing out differences, he added.
"We shouldn't rush to any conclusions," he said.
"If no solution comes from one round of talks [with the BRN], we can come back and talk again next time.
"But if both sides insist on their own proposals that no one else accepts, talks are impossible."
Gen Prayuth added that resolving the southern problems will take time because they concern deep-rooted beliefs.
NSC secretary-general Paradorn Pattanatabut said the BRN has submitted its demands as part of the peace talks and these have been forwarded to parties concerned.
Their feedback on the demands will be sent to the negotiating team later.
Lt Gen Paradorn said the next round of talks with the BRN is tentatively set for the third week of next month.
The results of the group's promise to reduce violence during this year's Ramadan festival are likely to be reviewed, Lt Gen Paradorn said.
The NSC chief said the southern situation is improving in part due to searches of suspected insurgents' hideouts.
Meanwhile, two police officers providing security for teachers were slightly injured by a bomb explosion on a road in Yala province yesterday.
Pol L/Cpl Kiattisak Plipol and Pol L/Cpl Nitikorn Dalem of Yaha police station were part of an eight-man patrol unit.
They were patrolling the Yaha-Kabang road in Yaha district when the roadside bomb exploded. Hidden gunmen also opened fire on them.
A civilian, who has not yet been identified, was injured. Two men were held for questioning.