The decision of the Cabinet, presided over by Prime Minister Manmohan Singh, will come into effect after promuglation of a notification by President Pranab Mukherjee.
It has to be then endorsed by Parliament through a resolution under Article 356 of the Constitution.
Lashing out at Jung, Arvind Kejriwal, who resigned as Delhi Chief Minister yesterday, said that the LG was "openly flouting" the decisions taken by a majority government.
"I am questioning the logic of his decision (of not recommending dissolution of the House)," Kejriwal said, adding that the constitution says that he is bound by the decision taken by the Cabinet of a majority government.
In his report to the Centre, Jung did not favour dissolution of the 70-member Delhi Assembly as recommended by the council of ministers headed by Kejriwal when it met last night and decided to quit after being defeated in the Assembly over introduction of the Jan Lokpal Bill.
The LG's move keeps the option open for any political party or a combination of parties to try and form a government in future.
Sources said Jung has conveyed to the Centre that the national capital be brought under a spell of President's rule as no party is now in a position to form an alternative government.
The Assembly elections late last year had given a split verdict with no political party getting absolute majority. AAP, which won 28 seats, had formed the government in December with the outside support of 8 MLAs of Congress. BJP has 31 MLAs in the Assembly while NDA ally SAD has one.
The LG has also sent, along with his report, Kejriwal's resignation letter.
"This decision is completely wrong because any recommendation by an elected government is normally binding (on the Lt Governor)," Kejriwal said.
"Ours was not a minority government. Before resignation, we had got passed a Money bill in the assembly. This means ours was a majority government.
"If a majority government recommends something then it is mandatory for the Governor to accept the recommendations," he contended.
Kejriwal said the Cabinet decision was taken because Congress did not want fresh elections.
Backing the decision, Congress said, "we have already made it clear that whatever decision the Lt Governor will take, we will abide by that".
"The ball was in Lt Governor's court. He has information from different quarters. He is the best judge of the situation," party General Secretary in charge for Delhi, Shakeel Ahmed said.
BJP leader Arun Jaitley said the Kejriwal government had no imaginative policy about governance and public welfare and it was only interested in "cheap popularity" through "gimmickry".
He said most of the AAP MLAs were inexperienced, lacked maturity, had an agitational approach and were foreign to any form of governance.
"I have no doubt in saying that this was the worst ever state government that Delhi has seen... Thank God, the nightmare is over," he said.
Accusing AAP of betraying the people of Delhi by joining hands with corrupt Congress to form the government, Delhi state BJP president Vijay Goel said that AAP believed in Maoist ideology of creating anarchy.
"AAP government undermined democratic and constitutional norms. There was complete anarchy. AAP ministers were found to be indulging in corruption yet they were not dismissed. Janlokpal bill is an excuse for Kejriwal to run away from responsibility," he said.
Sources said BJP is keeping its cards close to itself and not disclosing its strategy as it exploring options of government formation.
Asked to clarify the party's stand on whether it will come forward to form a government in Delhi, ," BJP's Legislative Party leader Harshvardhan said, "There is no over enthusiasm to form a government...We will happily accept every situation that comes our way."
Late in the night, Kejriwal questioned the move to keep the Delhi Assembly under suspended animation, and said it might "encourage horse-trading".
"Why suspended animation of Delhi Assembly Would it not encourage horse-trading," Kejriwal tweeted tonight.