Gillard, 51, called the vote after Rudd's supporters sought to force a party meeting to hold a ballot. Gillard, however, set a condition that the losing candidate quit politics.
Gillard or Rudd require a majority of the 102-member Labor caucus.
Gillard, the country's first woman prime minister, had ousted 55-year-old Rudd in a leadership challenge in 2010.
The development today comes ahead of a 14 September election, which polls suggest Labor is set to lose.
"And less politely perhaps, various ministers have been free and frank in their public advice to me as to the desirability of contesting the leadership in recent days. For the nation's sake I believe it's time for this matter be resolved."
He said tens of thousands of "ordinary Australians" have also been asking him to take back the leadership.
As she threw open her job to the ballot, Gillard said anybody who enters the ballot tonight should do it on the following conditions: that if you win you're Labor leader; that if you lose you retire from politics.
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