But a Friday night palace statement read on all Thai television networks called the princess's candidacy "extremely inappropriate" and against the "nation's traditions, customs and culture".
Prayuth also accepted on Friday the nomination as a candidate for prime minister from his military-backed party.
The announcement effectively invalidates Princess Ubolratana's unprecedented bid for prime minister in March elections and comes after an extraordinary rebuke of her candidacy by her younger brother Thai King Maha Vajiralongkorn.
Thai Raksa Chart is an off-shoot of the main pro-Thaksin Pheu Thai party, whose government, led by Thaksin's sister Yingluck Shinawatra, was ousted from power in 2014 in a coup led by then-army chief Prayuth.
The move by King Maha Vajiralongkorn's sister shocked a nation where top royals are officially treated with semi-divine status and protected by strict lese majeste laws that shield them from criticism. She relinquished her royal title when she married her American husband Peter Ladd Jensen in 1972 and settled in the U.S., where she studied biochemistry.
One of her chief opponents in the March 24 election will be Prime Minister Prayuth Chan-ocha, the leader of the ruling military junta, who also announced his candidacy on Friday.
The party falls under the tutelage of Thaksin, who stands at the heart of Thailand's bitter political schism - loathed by the army and Bangkok elite, yet adored by the rural poor for health, welfare and education schemes.
Just eight years after ousting Thaksin, the military stepped in again to remove his sister's government.
The turnaround in Ubolratana's fortunes was also seen as startling because the siblings are thought to be close, and it was considered unthinkable that Ubolratana would make her move without her brother's permission.
Thaksin's well-funded political machine returned to power twice since and is seen as the key element in arranging for Ubolratana's selection because she cast her lot with a Thaksin-affiliated party.
According to some analysts, royal family members of her "rank" are not barred from politics but have opted to stay neutral in the past, a long-standing protocol in most modern constitutional monarchies.
Thai politics for more than a decade has been shaken by violent street protests, coups and comebacks, but those are familiar events in Thai history.
Later that day, reigning King Maha Vajiralongkorn, 66, condemned the bid as unconstitutional and "inappropriate".
She was virtually disowned by her father in 1972 when she married American Peter Jensen, who was a fellow student at the Massachusetts Institute of Technology.
The Thai Raksa Chart Party was launched in November by relatives and supporters of the Shinawatras. She said she "sincerely wished" to see the kingdom progress and for people to enjoy unfettered rights, opportunities and happiness.
"I feel great. And I think she's a suitable choice", Thai homemaker Nirinsiri Chanboriboon, 41, told AFP after the announcement of her candidacy earlier Friday. In terms of the outcome, while Prayut was seen as being the likely victor by far in upcoming polls, the most likely scenario now is a unity, royal-led government with Ubolratana at the helm, with Thaksin's influence at play and some role for Prayut-linked forces as well. Like all the parties contesting the election, it had to submit its candidate list to the Election Commission on Friday.
Although Ubolratana has renounced her royal titles, she retains Diana-like star quality - enhanced by past film roles and a soi-disant "people's princess" image.
Princess Ubolratana is the eldest child of Rama 9, King Bhumibol Adulyadej, who died in October 2016, and Queen Sirikit.
"I would like to say once again that I want to see Thailand moving forward, being admirable and acceptable by global countries, want to see all Thais have rights, a chance, good living, happiness to all", she said, concluding with "#ILoveYou".