The decision was taken at a meeting of the cabinet presided over by Prime Minister Narendra Modi after LG Najeeb Jung sent his recommendation after talks on Monday with BJP, Congress and AAP who all expressed their inability to form government and sought fresh mandate.
"The Union Cabinet recommended dissolution of the Delhi Assembly with immediate effect," a senior Union Minister said after the brief meeting.
While the fresh elections may be held early next year, the process for the November 25 by-elections to three constituencies, for which last date of nominations is on Wednesday, will be cancelled.
The LG held consultations yesterday with political parties in the wake of the Supreme Court putting the issue on the fast track and giving him time till November 11 to explore the possibility of forming a government.
The court was hearing AAP's petition seeking early dissolution of the Assembly which has been under suspended animation since February after the fall of the AAP government.
In the outgoing Assembly, BJP and its ally Akali Dal have 29 MLAs in a House of 67. Three seats fell vacant after the incumbents were elected to the Lok Sabha.
BJP had emerged as the single largest party in the December Assembly polls winning 31 seats but fell four seats short of a simple majority.
It had refused to form government then, saying it will not resort to any "unfair means" to take over the reins.
AAP had formed the government in Delhi with the support of Congress.
The government led by Kejriwal had resigned on February 14 after the party's pet project, the Janlokpal Bill, could not be passed due to opposition from BJP and Congress.
President's Rule was imposed on February 17.

BJP not to project CM candidate in Delhi
BJP will contest the Assembly polls in the national capital under "collective leadership" and will not project any Chief Ministerial candidate, Delhi BJP chief Satish Upadhyay announced on Tuesday while exuding confidence of getting a clear majority in the election.
"The party has decided to contest assembly elections under collective leadership. We believe in collective leadership, but it doesn't mean that party lacks good leaders. We will not declare any chief ministerial candidate," he told reporters.
Justifying the decision, Upadhyay said BJP emerged victorious in assembly polls in Haryana and Maharashtra without declaring a chief ministerial candidate while insisting there is no dearth of "good leaders" in the party.
BJP had declared Harsh Vardhan as chief ministerial candidate in the run-up to the assembly polls last year. The announcement had triggered internal bickering as the then Delhi unit chief Vijay Goel was having chief ministerial ambition.
Sounding confident of emerging victorious, Upadhyay said the party will decide about the chief minister at the "appropriate time".
"There is a democratic process within the party. The party high command and the MLAs will decided about the next chief minister after the elections. Now, there is no issue about the CM candidate," he said.

Better late than never, says Congress
Congress took a dig at Lt Governor Najeeb Jung for his recommendation to the President for dissolution of the Delhi Assembly, saying it is "better late than never".
"There is a saying in Farsi 'der aaye, durust aaye' (better late than never). This should have happened long back, but the LG in his wisdom, on the advice of the BJP, tried to prolong it.
"Wisdom descended upon the LG only after the intervention of the Supreme Court", party General Secretary Shakeel Ahmed, who is in charge of party affairs in Delhi, said when asked about the development.
Centre forced to take decision on Assembly dissolution: Kejriwal
On a day Union Cabinet recommended dissolution of Delhi Assembly, AAP Chief Arvind Kejriwal said the Centre was forced to take the decision as BJP's attempts to "poach" AAP MLAs did not succeed and exhuded confidence of winning at least 45 seats in the polls to the 70-member House.

The former Delhi Chief Minister accused BJP of trying to form a government by "hook or crook", and thanked Aam Aadmi Party (AAP) legislators for "foiling" efforts by that party to take the reins of Delhi through "unfair means".
"BJP was trying to form government through dishonesty. Four attempts by them to form government had been foiled. Finally following court's intervention, they were forced to recommend dissolution of the Delhi Assembly," Kejriwal told reporters.
The AAP Chief also referred to a video released in September by his party in which Delhi BJP Vice President Sher Singh Dagar purportedly offered Rs 4 crore to an AAP MLA. BJP had issued a show cause notice to Dagar.
"This is probably for the first time in history of India that dishonest efforts to influence even a single MLA did not succeed. It proved that everybody is not for sale. There is still honesty," he said, adding, "I congratulate all party MLAs for foiling BJP's attempt."
Kejriwal, who led a 49-day government after the Assembly polls in December last year, said the NDA government has failed to check price rise and that law and order situation in Delhi was deteriorating "fast".
"We are confident of winning in at least 45 seats. We are confident that people of Delhi will bless us," he said. AAP had won in 28 seats in the last Assembly polls but drew a blank in the Lok Sabha elections here.

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