Ms Yingluck made the announcement in an address televised by the Thai Television Pool of Thailand.
She said she will remain the head of the interim government until there is a new cabinet.
"The situation seems likely to escalate to violence so the government has decided to return power to the people and let them decide through elections," the prime minister said.
Suthep Thaugsuban, the proclaimed secretary-general of the anti-government People's Democratic Reform Committee, made it clear that a House dissolution, or a resignation by the premier, would not be enough to end the rallies - not until the "Thaksin influence" is uprooted from the country.
On Sunday, Democrat leader Abhisit Vejjajiva, accompanied by party members, announced that all 153 party MPs have agreed to resign with immediate effect. The mass resignation was seen by observers as an attempt to force a House dissolution.