Koh Tao's reputation as a tropical paradise was first sullied in 2014 when two British backpackers were brutally murdered on one of its white-sand beaches.
A series of other foreign tourist deaths have fuelled press coverage about the island's 'dark side,' with allegations of local mafia and corrupt police colluding to cover up murders.
The latest case to raise suspicions was the death of a Belgian woman in April, which police ruled was a suicide.
Local online outlet Samui Times ran an article last month that questioned the police account and referred to Koh Tao as "Death Island".
The piece quickly went viral and forced officers to re-examine the case.
But island authorities are now suing Samui Times for violating the Computer Crime Act, which outlaws uploading false information online.
The tough law, which carries a maximum prison sentence of five years, is frequently wielded by authorities and business elite to suppress critical reporting in Thailand.
Koh Tao mayor Chaiyan Thurasakul told AFP the website is accused of "damaging Koh Tao's reputation by calling it Death Island."
The charges were filed Thursday by local district chief Krikkrai Songtanee, who said the report had caused "panicked tourists to cancel their bookings".
Police will review the charges and decide whether to take the case to prosecutors.
Samui Times, which told AFP it had yet to be contacted about the charges, defended its reporting in an online post.
"The Samui Times believes that it is in the best interests of any visitor to the island to be aware of the numerous tourist deaths and the fact that many families of those who died on the island are not satisfied with police investigations", it said.
The English-language newspaper Bangkok Post blasted the lawsuit in an editorial, calling on authorities to clear up any misinformation instead of intimidate the outlet.
In 2015 another local news website, Phuketwan, closed after running out of money in its successful bid to defeat a defamation suit brought by Thailand's navy over its reports on human trafficking.