"After listening to opinions from all sides, I have decided to request a royal decree to dissolve Parliament," Yingluck said in a televised statement.
"There will be new elections according to the democratic system," said the 46-year-old prime minister who came to power in 2011.
"The people will decide what the majority wants and who they want to government the country," she said in an effort to defuse the over two-week long crisis.
"I would like to ask every political group and party to use elections under the democratic system to find a solution for the people of Thailand," she added.
Her announcement came as thousands of protesters took to the streets of the Thai capital in a "final showdown" against her government.
Opposition MPs yesterday resigned en masse to join the anti-government protests.
The opposition Democrat Party had said its 153 MPs were resigning from the 500-seat lower house - a move that does not prevent the ruling Puea Thai party from passing new laws but leaves parliament facing questions about its legitimacy.
In 2010, thousands of "red-shirt" Thaksin supporters occupied key parts of the capital. More than 90 people, mostly civilian protesters, died over the course of the two-month sit-in.
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