Ms Yingluck won elections in 2011, her Pheu Thai party winning a majority, with 265 seats to the Democrat Party's 159 seats.
Anti-government protesters have been demanding her resignation and allege her government is controlled by ousted leader Thaksin Shinawatra, her brother.
Yingluck's announcement came as 100,000 protesters marched through the streets of Bangkok for a "final showdown."
They began demonstrations last month.
"The government does not want any loss of life," she said in a televised address. "At this stage, when there are many people opposed to the government from many groups, the best way is to give back the power to the Thai people and hold an election. So the Thai people will decide."
On Sunday all opposition MPs resigned from parliament.
No date has been set for the election although Ms Yingluck said the Election Commission would set a date "as soon as possible."
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