Japan's Prime Minister Junichiro Koizumi has dissolved the lower house of parliament and called an early election for 11 September.
Mr Koizumi had previously said he would step down next year
The move follows the defeat in the Upper House of his landmark proposals to reform the country's postal system.
The vote was a huge blow to Mr Koizumi, who staked his reputation on the issue.
One minister has resigned over his decision to call an early election, and his divided party may now face a close race in the poll.
The postal reform would have transformed Japan Post, with its $3 trillion assets, into the world's largest bank.
If Mr Koizumi wins the election, he may only lead the party for a year, as he has previously said he would step down in September 2006.
JAPAN POST IN NUMBERS
Manages 25% of Japan's personal assets
25,000 offices and 260,000 employees
330 trillion yen (nearly $3 trillion) in savings and deposits
85% of population has postal savings
But an LDP win is far from certain. Despite being in power for the majority of the last 50 years, the party has seen a recent decline in popularity.
In the last Lower House elections, in November 2003, Mr Koizumi was returned to power with a reduced majority - while the opposition Democratic Party (DPJ) made gains. The DPJ also increased its representation in the Upper House last year.
The defeat of the postal reform bill - by 125 votes to 108 - has also revealed deep divisions within the ruling LDP, with 22 members voting against the measure.
Mr Koizumi's coalition partners - and even some within his own party - did not want him to call an election for fear they could lose.
Agriculture Minister Yoshinobu Shimamura announced his resignation at Monday's cabinet meeting, saying he was not the only minister to oppose the decision to call an election.
Those LDP members who voted against the postal bill are said to be angry that Mr Koizumi has called for an election, rather than offering his resignation.
"There is no justification. It's like suicide bombing," LDP lawmaker Housei Norota told Reuters news agency.
Media reports indicate that Mr Koizumi could bar those who voted against him from running on the LDP ticket in the September poll.
Public sector monolith
The prime minister had made post office privatisation the cornerstone of the economic reforms he has pursued since taking office in 2001.
Architect of the plans Heizo Takenaka could not hide his dismay
Proponents of the reforms say they are urgently needed to put the postal service's massive deposits into the hands of private investors and provide an impetus to the economy.
"The rejection is a major blow to Japan's future and its economy," said Economy Minister Heizo Takenaka, the main architect of the reform.
But the plans had been opposed by many, who feared they would lead to a poorer postal services.
Opponents also said the reforms would lead to many job losses in rural communities.
Japan Post is a huge organisation, which has about 25,000 post offices nationwide, which all sell the system's savings and insurance products, as well as regular postal services.
In contrast, the seven main national banks have only 2,600 branches between them.
Japan Post is also the biggest buyer of Japanese government bonds, helping Tokyo maintain unusually high levels of public debt.
In rural areas it has been traditionally used by politicians as an unofficial vote-gathering machine - and has often been used to support politically popular public works.
Local post masters have a certain status in small communities, and the job is often handed down over generations.
The package of six bills proposed that Japan Post became privatised by 2017, and divided into private companies handling mail delivery, banking and insurance.