The proposal, which comes after weeks of anti-government protests that have rallied more than 200,000 people at their peak, could be put into play soon and would be free of government interference, Yingluck said in a televised address.
Yingluck is caretaker premier after calling a snap election for February 2 in a bid to deflate the protests. Her compromise offer was immediately rejected by the protesters, who draw strength from Bangkok's middle class and elite and who dismiss her as a puppet of her self-exiled brother, Thaksin Shinawatra.
Thaksin and Yingluck have their power bases among the vote-rich north and northeast but their opponents accuse former premier Thaksin of manipulating the rural poor in those areas to entrench his power.
Yingluck's plan calls for a council of 499 eminent Thais, chosen by a wider group of 2,000, to examine reform of Thailand's political system, Reuters reported.
It looks similar to the unelected "people's council" protest leader Suthep Thaugsuban has proposed to replace the government, with one crucial difference. Under Yingluck's proposal, the reform council would operate alongside an elected government, not an appointed one.
"This council is not the government agency ... it would let it run on its own and would not be overshadowed or influenced by the government," Yingluck said.
"I insist that the new elected government will take this and implement what the council decides on how to reform the nation."
Demonstrators still want to derail the election because they know Thaksin's populist political juggernaut is almost certain to win the vote, as it has at every ballot since 2001.
This is despite violent street protests, judicial and military intervention around other elections since then.