The beheading in Narathiwat province was the fifth in just over two weeks and apparently the first to be carried out in broad daylight.
Also Wednesday, suspected separatists detonated two bombs in the provincial capital, injuring eight people including two Buddhist monks.
Praying Muslims shot in Thailand
The beheading victim, Lek Pongpla, 34, was an itinerant clothes vendor from northern Thailand, said police Lt. Wattana Ketamphai.
He said the man was shot twice before his head was cut off in front of three customers.
The attacker, a suspected Muslim insurgent, then put the head in a sack which he dumped on a road in Joh Irong district about two km away, said Wattana.
On Saturday, the beheaded bodies of two Laotian migrant workers were found in Pattani, which along with Narathiwat and Yala provinces has been the scene of intense sectarian violence that has claimed about 880 lives since January last year.
The provinces bordering Malaysia are the only predominantly Islamic areas in Buddhist-majority
On June 15, the head of a 65-year-old retired Buddhist school teacher was found in Pattani, and on June 6, a Thai Buddhist rubber plantation worker was beheaded in Yala.
Notes left with the bodies in several cases claimed the actions to be revenge for alleged repression by Thai authorities.
While the beheadings may have been inspired by those in Iraq, Thai officials believe they are primarily meant to terrorize the minority Buddhist population in the south into moving away.
Last year there were three beheadings in the south, though most killings by insurgents have been drive-by shootings.
Meanwhile, a 3-kilogram (6.6-pound) bomb exploded Wednesday morning in Narathiwat's capital district, slightly injuring two Buddhist monks, two policemen and three villagers, police said.
The bomb was triggered by mobile phone as the monks, guarded by police, were on their traditional morning rounds to receive alms. Security forces guard monks and their temples because they have been the targets of extremists.
Later Wednesday, a 5-kg bomb exploded at a parking lot for city offices in the same district, injuring one person and damaging two cars and two motorcycles.