"The number of dead has risen to five now... and some 40 others are injured," Narathiwat provincial Governor Pracha Taerat said in a live interview with broadcaster iTV. Police at the scene told AFP the bomb was detonated in a pickup truck outside the Marina Hotel at 7:05 pm (1205 GMT), in an area crowded with open-air beer bars.
"This was a huge car bomb, with almost 100 kilograms (220 pounds) of explosives," the governor said, adding about four shop fronts were destroyed in the blast.
A wedding party attended by a number of local police had gathered on the third floor of the hotel, police said.
Sungai Kolok is a town along the Malaysian border whose nightlife district is routinely visited by scores of Thai and Malaysian tourists. It has been the scene of three other major blasts since last March.
Most explosions in the Thai south have been relatively small, with bombs hidden in motorcycles or placed along the side of the road.
Pracha said Thursday's bomb showed a new level of destruction in the region.
"We did not expect this kind of car bomb. It is unprecedented in Thailand," he said.
It was also the fifth to rock southern Thailand in 48 hours and came just two hours after Thaksin flew out of the deep south.
Thaksin had cut short by about a day his first trip to the Muslim-dominated region since his party won a landslide re-election on February so he could attend a rally in north-eastern Thailand for a party colleague running in a by-election.
During his high security trip Thaksin vowed to crush the separatist revolt - which is seeking greater autonomy from the majority Buddhist Thai kingdom - during his unprecedented second term.
"I will eradicate it (the separatist movement) within the next four years," Thaksin told reporters before touring southern Yala province, which with neighbouring Narathiwat and Pattani has bourne the brunt of the unrest.
Thaksin said Wednesday that areas prone to unrest and judged to be sympathetic to militants would be identified as "red zones" and denied crucial government funding.
"I don't want money going towards supporting insurgents in red-zone villages to be used to buy bombs and guns," he told thousands of villagers in Yala's Betong district near the Malaysian border.
Thaksin said that of 1,580 villages in the three southernmost provinces, 358 were listed as "red" including about 200 in Narathiwat alone. Two hundred are deemed "yellow", meaning there is moderate resistance to the state, while the rest are "green" areas where 90 percent of residents abide by the law.
Thaksin said he hoped the policy could pressure villagers into informing on militants or severing ties with them.
Although Thaksin's Thai Rak Thai party scored an overwhelming victory in the elections, it failed to win a single seat in four southern Muslim majority provinces.