Prime Minister Yingluck Shinawatra has faced more than a month of sometimes-violent street protests by demonstrators who want to suspend the country's democracy in favour of an unelected "People's Council".
Thai opposition lawmakers resigned en masse from parliament Sunday, deepening the political deadlock.
Yingluck, the sister of ousted leader Thaksin Shinawatra, announced in a televised national address Monday that she would dissolve parliament and hold a general election "as soon as possible".
"The government does not want any loss of life," she said, amid fears that the mass rallies could bring fresh violence.
The election move could increase pressure on protesters to agree to some kind of compromise with the government.
But the leaders of the anti-government movement said that they were not satisfied with new elections, pledging to rid Thailand of the influence of Thaksin, a tycoon-turned-premier who was ousted by royalist generals in a coup seven years ago and now lives abroad.
"The movement will keep on fighting. Our goal is to uproot the Thaksin regime. Although the House is dissolved and there will be new elections, the Thaksin regime is still in place," protest leader Suthep Thaugsuban told AFP.
"My people want more than dissolution. They are determined to regain their sovereignty," he said.
Thaksin -- who once described Yingluck as his "clone" -- is widely considered the de facto leader of the ruling party.
Pro-Thaksin parties have won every election in more than a decade and despite the mass protests, many experts believe Yingluck's party is likely to triumph in new elections.
The opposition Democrat Party -- which said Sunday its 153 MPs were resigning from the 500-seat lower house because they could not achieve anything in parliament -- has not won an elected majority in about two decades.
100,000 protesters take to the streets
Around 100,000 people were estimated to have joined the protests by mid-morning, according to the government's Centre for the Administration of Peace and Order, which was set up to deal with the unrest.
Demonstrators marched along several routes through the capital towards the government headquarters -- the main target of the rally -- paralysing traffic in parts of the city.
Thaksin's overthrow ushered in years of political turmoil and sometimes bloody street protests by the royalist "Yellow Shirts" and the rival pro-Thaksin "Red Shirts".
Tensions remain high in the kingdom after several days of street clashes last week when police used tear gas, water cannon and rubber bullets against rock-throwing demonstrators.
The unrest has left five people dead and more than 200 injured. The authorities have said they would try to avoid fresh confrontation.
"Police are unarmed, with only shields and batons. We will not use tear gas, or if we have no choice, its use will be limited," Interior Minister Jarupong Ruangsuwan said in a televised news conference late Sunday.
"The government believes we can control the situation. We will focus on negotiation," he added.
Demonstrators and police have observed a temporary truce since Wednesday for the 86th birthday of King Bhumibol Adulyadej, who is treated as a near-deity by many Thais.
With turnout dwindling, Suthep had called for a final push to bring down the government.
"We want you to come out and march in every road. We will not go home empty-handed," the protest leader said in a speech to supporters late Sunday.
The former deputy premier, who now faces an arrest warrant for insurrection, has vowed to surrender to the authorities unless enough people join the march to the government headquarters.
Thailand's political conflict broadly pits a Bangkok-based middle class and royalist elite backed by the military against rural and working-class voters loyal to Thaksin.
The former premier went into exile in 2008 to avoid jail for a corruption conviction which he says was politically motivated.
The demonstrations were triggered by an amnesty bill, since dropped by Yingluck's ruling party, which opponents feared would have cleared the way for Thaksin's return.
They are the biggest and deadliest street demonstrations since 2010, when dozens of people were killed in a military crackdown on mass pro-Thaksin Red Shirt rallies in Bangkok.