In a televised broadcast to the nation, Prime Minister Yingluck Shinawatra announced the dissolution of Parliament as "the best way is to give back the power to the Thai people," the Nation reported.
Thai media suggest Feb. 2 as the date for an election, but the Electoral Commission will have the final say after discussions with Yingluck and her Pheu Thai party government.
The dissolution announcement failed to stop massive demonstrations in the capital Monday that focused on the ornate Government House that sits on 11 acres and houses the offices of the prime minister and her Cabinet.
The protesters have been demanding Yingluck and her Cabinet resign to make way for an unelected "people's council" that would decide on political reforms, including the type of government ahead of elections, the Bangkok Post reported
But Yingluck dismissed the idea of a People's Council as not constitutionally possible.
The main rally led by protest leader Suthep Thaugsuban and his People's Democratic Reform Committee was nearly two miles long when it started the 18-mile march from the government complex on Chaeng Wattana Road to Government House in the center of Bangkok.
The Post estimates more than 200,000 protesters took part.
The election announcement comes a day after all politicians from the opposition Democrat Party resigned their seats.
Thaugsuban, a former senior Democratic Party Member of Parliament and now PDRC secretary-general, said neither the dissolution nor the prime minister's resignation would end the rallies.
Yingluck won national elections in 2011 that gave her Pheu Thai party a majority in the Lower House, with 265 seats to the Democrat Party's 159.
But her administration has been hobbled by accusations that she is a surrogate leader for her disgraced brother Thaksin. He was ousted in a bloodless military coup in 2006 that left the country divided.
Thaksin, who led the Pheu Thai party in government -- now his sister's party -- denied the allegations, but was sentenced in 2008 and soon after fled the country.
Yingluck continually denies anti-government accusations that she takes orders from her self-exiled brother.
Her current round of troubles began last month after her government tried but failed to get an amnesty bill passed by the lower and upper houses of Parliament.
More than 90 anti-government protesters died in violent clashes with security forces on the streets of Bangkok in 2010. About 2,000 people were believed injured during the fighting when protesters blocked Bangkok's central old-town streets for several weeks before security forces moved in.
Yingluck defended the controversial amnesty bill that would have allowed reconciliation for alleged political offenses during and after Thailand's 2006 coup.
The bill, which would have pardoned people, including political leaders, was passed unopposed by the lower House of Representatives but failed to pass the Senate, ending the bill's chances of becoming law.
The amnesty likely would have included Thaksin's sentence for corruption, the Post reported at the time.
Anti-government protests had been largely peaceful until deadly clashes Dec. 1 left three people dead.
After Yingluck announced the dissolution of Parliament Monday, deputy army spokesman Col. Winthai Suwaree said the military wants to avoid violent clashes with protesters.
"Political tensions have eased up to an extent," he said. "[The army] hopes all parties will cooperate and act within the rule of law so that the situation can be properly resolved."
But protests likely will continue, the BBC reported. Many of the protesters want the entire democratic system overhauled and for Yingluck and her family to leave Thailand.
In the next election, the Pheu Thai party would be well-placed to win because much of its support comes from poor and rural areas of Thailand. Many protesters are urban Thais living mostly in Bangkok.
Opposition grievances include the belief that the governing Pheu Thai party's five consecutive election victories were fraudulent. Because of this, there is uncertainty whether the Democrat Party would contest or boycott the election, the BBC reported.