The Union Cabinet also decided to place under suspended animation the Andhra Pradesh Assembly whose term is slated to end on June two.
Along with this decision, the Cabinet gave approval to proposals for Seemandhra region, including setting up of three Kendriya Vidyalaya schools and premier National Institute of Design. The NID was earlier planned to be set up in Hyderabad in the Telangana region.
Once President Pranab Mukherjee gives his ascent to the Cabinet decision, Andhra Pradesh will become the second state after Delhi to be placed under the central rule.
The decision to impose the President's Rule in Andhra Pradesh was necessitated by Reddy's resignation as the Chief Minister on February 19 as he was opposed to division of the state to carve out Telangana.
Governor E S L Narasimhan had recommended central rule in the state after the resignation.
The bill to create the country's 29th state, by splitting Andhra Pradesh, was passed by Parliament on February 20 in the just-concluded Winter Session.
The Kendriya Vidyalaya schools, to be set up in Kadappa, Guntur and East Godavari districts of Seemandhra, will cost Rs 15 crore each, according to Rural Development Minister Jairam Ramesh.
Sources said the NID was originally proposed by the Ministry of Industries to be set up in Hyderabad but at today's Cabinet meeting, Ministers from Seemandhra insisted that it should be established in "appropriate location" in their region. Finally, Vijayawada was identified for this.
On the issue of a capital for Seemandhra, various places have been suggested. These include Kurnool, Tirupati, Vijayawada and Vishakapatnam, sources said.
The process for selecting the capital will be set into motion only after the President gives his nod to the Bill for creation of Telangana, the sources added.
As per the proposal, a committee will be set up which will tour the cities suggested and have deliberations with the prominent people and groups there. The process will be completed in a few months, the sources said.
The sources also said that the revenue generated from Hyderabad will go to Telangana only as separate sops, like a special category status for five years and tax incentives for 10 years, have been extended to Seemandhra region.
Reddy had resigned on February 19 from his post as well as Congress protesting the manner in which the state was being divided "by throwing all norms to the wind" and lashed out at political parties for dividing the state in quest of "votes".
He had quit a day after the bill to carve out Telangana was passed by Lok Sabha with Congress and BJP coming together on the issue.
A number of ruling Congress MLAs from coastal Andhra and Rayalaseema also announced resignation from their posts and also from the party over the issue of division.
A section of the AP unit of Congress was in favour of propping up an interim government, contending that their prospects in Seemandhra were bleak now in view of the party pushing ahead with the formation of Telangana, coupled with the anti-incumbency factor after having been in office for ten years.
Ruling Congress, however, did not propose another candidate to succeed Reddy. He had tried to thwart division of Andhra Pradesh by ensuring rejection of the Telangana bill by the state legislature, invoking displeasure of the party.
The term of the 294-member current Andhra Pradesh Assembly expires on June 2, 2014 before which elections are to be held. The Election Commission is set to declare Assembly polls along with the Lok Sabha elections in the next few days.
Live: BSE Sensex