The decision was taken at a meeting of the cabinet presided over by Prime Minister Narendra Modi after Lieutenant General Najeeb Jung sent his recommendation after talks on Monday with the Bharatiya Janata Party, the Congress and the Aam Aadmi Party 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 on Monday 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, the 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.
The 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.
The AAP had formed the government in Delhi with the support of the 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 the BJP and the Congress.
President's rule was imposed on February 17.
Image: AAP supporters put up posters depicting results of poll surveys of the last election on a rickshaw in Delhi. Photographs: Courtesy: AAP/Facebook
Maruti Swift, Datsun GO score 'zero' in safety test
These 10 stunts are for those who DARE!
Hrithik, Amitabh, Salman: Modi's filmi crusaders
'Headlines like 'Endulkar' hurt and retirement crossed my mind'
5 lessons from Mark Zuckerberg