The 67-year-old princess was nominated Friday by the opposition Thai Raksa Chart Party.
The nomination pits the princess against current Prime Minister Prayuth Chan-ocha, the preferred candidate of the military, considered one of Thailand's most royalist institutions.
Preechapol Pongpanich, Thai Raksa Chart party leader, centre, holds up the application of candidate for prime minister for Thailand's Princess Ubolratana, in Bangkok on Friday.
Ubolratana's decision to link up with a Thaksin-backed party raised the possibility that she could help push through changes to the Constitution that would make it more democratic.
The other destabilizing element in Thai politics was the 2001 election as prime minister of telecommunications tycoon ThaksinShinawatra.
Analysts said she is not technically covered by the kingdom's royal defamation law - which carries heavy jail sentences - but given the culture of deference to royalty, she is unlikely to face the scrutiny given to most politicians.
"This could actually be a boost for Prayut because now people may see that the king is not supporting his sister", said Paul Chambers, a lecturer at Naresuan University's College of Asean Community Studies.
Yet a small party that supports the junta later Friday submitted a letter to the Election Commission objecting to the nomination of the princess, saying it should be suspended as it could violate election law.
But the opposition from Ms Ubolratana's younger brother, a constitutional monarch, is likely to lead to her disqualification by the Election Commission.
Now, Ubolratana threatens to redraw lines of allegiance in Thai society, as a member of the monarchy who is running against the leader of the pro-royalist military. She made no known public appearances Friday. Ubolratana falls into a gray area, since she is commonly called a princess and treated as such, despite losing the royal designations after her marriage. Ubolratana to some extent was living the typical American life, calling herself Mrs. Julie Jensen, having adopted the nickname Julie during her youth, reportedly in tribute to American singer Julie London.
"This act of mine, I have done out of sincerity and intention to sacrifice in this request to lead the country to prosperity", she said.
Palace officials could not be reached for comment.
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But his order stressed that Thailand's constitution insists that the king and those around him stay above politics, and the principles of democratic government also put politics off-limits.
"I have thoroughly considered the party's policies and I deem that they can further the programmes the [military regime] has initiated.so I accept the Phalang Pracharat Party's nomination as a prime minister candidate", Prayut said in a statement. Like Princess Ubolratana, he is not a sitting MP.
The Thai Raksa Chart Party in Thailand has cancelled its campaigning plans for the upcoming elections after the king rejected his sister's candidacy for prime minister.
If she does remain as a candidate, there are other question that remain, chief among them being how the competitive dynamics of the election would be affected.
Ms Ubolratana, the eldest child of King Bhumibol, was born in Lausanne in 1951.
Energetic and ebullient, her main public activities involve a youth anti-drug campaign she founded called "To Be Number One", and promoting Thai tourism and movies at global forums. She also frequently promotes Thai tourism and movies at worldwide forums.
But she is still untested politically and Thai social media was full of scepticism over the move - with many unsure what to make of it.
The election has been viewed as a battle between populists and their allies, and the royalist-military establishment. Violent street protests and two military coups have marked the years since.
After leaving the royal family to follow her heart nearly 50 years ago, the 67-year-old sister of current monarch King Maha Vajiralongkorn is again upending protocol by entering politics. "It goes against the law", said Mr Paiboon. "I only want to work for the benefits of the country and the people", he added.
When King Maha Vajiralongkorn, who has lacked the same level of devotion most Thais had for his father, ascended to the throne, conventional wisdom saw him as tightening his grip on power by allying himself closely with the military.
The BBC's Jonathan Head said the move to nominate the princess looks like a grave miscalculation, one likely to weaken the pro-Shinawatra faction trying to push the military out of politics.
He acknowledged, however, that it is too soon to tell what end result the king has in mind.