The Bank of Thailand expects the economy to grow by just 2.6 percent in 2011, down from its previous projection of 4.1 percent, according to its quarterly report.
"The widespread flood, now affecting not only agricultural production but also manufacturing activity, is likely to weigh on the fourth quarter's growth substantially," it said.
The bank may further lower its projection if the situation worsens, particularly if inner Bangkok is flooded, assistant governor Paiboon Kittisrikangwan told reporters.
Thailand's deadly three-month flood crisis has interrupted economic activity and weakened domestic demand, the BoT said, while global economic woes were expected to weigh on exports.
Thousands of inundated factories have been forced to shut down in Thailand in recent weeks, putting more than half a million people temporarily out of work.
Car parts manufacturers and hard-disk drive producers have been particularly severely affected.
For 2012, the bank expects the Thai economy to grow 4.1 percent on the back of a recovery in domestic demand which will help offset slowing exports.
The bank also revised down its inflation forecast for 2011 to 3.8 percent from 3.9 percent. It kept its projection for core inflation at 2.4 percent.
Thailand, whose economy rebounded strongly from political violence last year, has held its interest rate at 3.5 percent since August to boost growth, pausing after a series of hikes to tame inflation.