The decision came just hours before the parliament was due to debate a motion seeking a six-month extension of the state of emergency imposed to fight Maoist rebels - a motion which looked set to be defeated.
Prime Minister Deuba was facing growing hostility to his proposal to extend the emergency - which is due to expire on Saturday - not only from the opposition but from his own Congress party.
One of his Congress rivals, Ram Chandra Paudel, condemned the dissolution, saying the country could not hold an election while the conflict with the rebels continued.
"It would be shocking and surprising to have an election on 13 November," the former deputy prime minister said.
"It would be a disaster, as the election cannot be held so soon because of the Maoist situation."
The prime minister's rivals within the party opposed the move when they attended a central committee meeting on Wednesday.
But Information Minister Jaya Prakash Gupta justified the dissolution, saying that divisions within the ruling party had left the government with no alternative.
"We had no other option but to go to the polls again," he said.
"We never thought the party would try [to] step on the position of the government like this."
'Self-interest'
Extending the emergency would have required a two-thirds majority in the 205-seat parliament and the divided Congress party held only 113 seats of the seats.
One dissident Congress MP, Shiv Kumar Basnet, said earlier that the prime minister had tried to "step over the party's authorities".
The main opposition party, United Marxist-Leninist (UML), accused Mr Deuba of pursuing his own interests.
"For the love of his chair he has plunged the nation, the people and democracy toward a grave accident," said Bharat Mohan Adhikari, the UML chief whip.
He suggested that the prime minister was trying to turn the clock back to before 1990 when the monarchy held absolute power in Nepal.
Military action
The government had argued that an extension of the emergency would yield further progress in the military operation against the Maoists which, it says, has been going well in the past six months.
War in Nepal
At least 4,000 dead since 1996
Half of deaths in past five months alone
Emergency declared in November 2001 after peace talks stalled
But critics say existing anti-terrorism laws are sufficient to tackle the rebels who have launched their heaviest attacks yet in recent months.
Mr Deuba has been accused of succumbing to pressure from the police and army, which has said in the past that it will not deploy against the rebels if there is no state of emergency.
The government has in turn accused the opposition of trying to make political capital out of the crisis.
Mr Deuba said a rejection of the state of emergency would be a blow to the morale of the security forces.
"This will do nothing but discourage our forces on the battle grounds," he said.