The dissolution is expected to result in a new head of government, who will be seen as Putin's choice to succeed him after he steps down next spring.
Prime Minister Mikhail Fradkov said he asked for the dissolution because with elections approaching, Putin needed to have a free hand to make decisions, including those concerning appointments.
Putin agreed: "You might be right that we must all think about how to structure the government so that it better suits the pre-election period and prepares the country for what will happen after the parliamentary and presidential elections."
Under the Constitution, Putin now has two weeks to propose a new head of government, which the lower house of parliament, the State Duma, then has a week to vote on. Russian news agencies said Fradkov would serve as acting prime minister until the vote.
The parliamentary elections are scheduled for Dec. 2, followed some three months later by presidential elections.
The newspaper Vedomosti, citing unnamed Kremlin officials, reported Wednesday that Sergei Ivanov, a first deputy prime minister and a leader contender to succeed to Putin, could be appointed prime minister in the near future.
Another first deputy prime minister, Dmitry Medvedev, who is a top executive at natural gas monopoly JSC Gazprom, is considered the other leading contender.
The Kremlin believes that new possible sanctions against Russia may lead to disastrous consequences, as Washington's actions will come contrary to the generally accepted rules of international trade