The prime minister made the proposal in an address televised by the Thai Television Pool of Thailand at 12.30pm after a meeting with high-level government members at the Centre for the Administration of Peace and Order ahead of the People's Democratic Reform Committee's planned mass rally at Government House tomorrow.
Ms Yingluck said that in order to resolve the ongoing problems the government was willing to dissolve the House of Representatives if it was the wish of the people on condition it strictly follow the constitution.
In other words, after the House dissolution a fresh election must be held in 60 days as required by the constitution, she said.
But if the protesters and major political parties do not accept this way out or do not accept the result, the election would only extend the conflict further.
She cited the state of chaos which followed the election in 2006 in which a political party - the Demcrats - refused to field a candidate, causing a political vacuum which eventually led to the 2006 coup.
The prime minister said the government, therefore, proposes the setting up of a forum to consider the proposals raised by the protesters. If no agreement was reached in the forum, a public referendum should be carried out for the majority of people to decide and suggest a way of holding a clean and fair election. The decision must receive a consensus from all political parties, the protesters and all other sectors concerned.
An election could then be held under democratic rule and as stated by the constitution to end existing problems.
"I would like to confirm once again that I am not clinging to my position. I am willing to dissolve the House or resign if I am convinced that it would really be a way out to solve problems and enable the country to go forward. That is to say, the decision must be truly made by the majority of the people," she said.
On Mr Suthep's proposal for the return of power to the people without requiring an election, a House dissolution or the prime minister's resignation, Ms Yingluck said it was new and unprecedented. It was still arguable whether the proposal was lawful or democratic.
"To have a government without an election is a big issue which can affect the image and confidence of the country. If this proposal is to be put into practice, the people should be asked whether it is acceptable to them. Therefore, a public referendum is required and this method is allowed by the constitution.
"On Monday, December 9, the government would be glad to take the protesters' proposals into consideration and explore a common way out. Today, nobody is a loser. All of us, including the nation, are the winner," she said.