Najib's National Front coalition lost its two-thirds parliamentary majority for the first time in 2008 elections and faces a confident three-party opposition alliance led by former deputy prime minister Anwar Ibrahim.
"The king has accepted my request to dissolve Parliament effective April 3," Najib said in a live television address from the administrative capital Putrajaya, adding he hoped his coalition would win a "solid majority".
The election is expected to be held on April 27 following a two-week campaign period.
Najib, who took over in 2009 in the wake of the election debacle, will point to brisk economic growth of 5.6% as he seeks to regain lost electoral ground.
The 59-year-old son of a former premier is aiming to push the developing country into high-income status by 2020 through an ambitious $444-billion economic transformation programme.
He has warned repeatedly that an opposition victory could result in social and economic instability in the South-east Asia nation of 29-million people that has a history of tensions between majority Malays and minority ethnic Chinese and Indians.
"Don't gamble the future of your children and Malaysia, think and contemplate because your vote will determine not only the future of the country but also your grandchildren," Najib said in his television address.
Time for a change
The opposition, which has won control of four out of 13 state governments, aims to tap into a growing desire in Malaysia for faster political and economic reform, arguing it is time for a change.
Najib's coalition is expected to win, but the prime minister is under intense pressure to improve on 2008's result and restore the two-thirds majority. Failure to do so could result in a leadership challenge from within UMNO and raise doubts over his reform plans.
Race-based social and economic policies have defined the coalition's rule as it channelled wealth to ethnic Malays, who make up about half of the population, over the economically dominant Chinese minority since 1969 race riots.
Ethnic Indians also form a smaller minority in the former British colony, South-east Asia's third-largest economy.
A skewed electoral system, deep pockets, and about $2-billion in government handouts to millions of poorer Malaysians since the start of 2012 will likely help the National Front.
A lack of reliable opinion polls makes it difficult to forecast the outcome. Few predicted the extent of opposition gains in 2008, which triggered a 10% plunge in Kuala Lumpur stocks. Anything less than a convincing win for Najib could trigger similar market volatility.
A recent poll by the University of Malaya showed the ruling coalition at 42% support compared with the opposition's 37%, but with 21% of voters still undecided.
In February, the independent Merdeka Centre showed Najib's approval rating at 61%, down 10 points since the end of 2011. His coalition is less popular, polling at 45%.
Anticipation of a close election that could cause policy uncertainty has frayed investors' nerves this year and made Kuala Lumpur's stock market one of the worst performers in Asia.
The main KLSE stock index briefly fell more than 3% in early Wednesday trade following the announcement of Najib's television address. It later recovered to trade 1% lower.
"There has been some pullback, but I think the market will recover soon because funds will look to increase their equity exposure," said Benny Chew, managing director of equity research at AmInvestment Bank.
"Anticipation of the announcement has led to a sell-down, but funds will look for cheap entry after this," he added. – Reuters