In a televised address, Saakashvili said: "I offer you an immediate ceasefire and the immediate beginning of talks."
He repeated an offer of "full autonomy" for the breakaway region.
Jonah Hull, Al Jazeera's correspondent in Moscow, described the offer as an "olive branch".
"It was turning into a situation where we were waiting and wondering which side would back down first.
"It seems that Georgia is offering here some sort of an olive branch. It's certainly an admission and a sign of just how serious things have become in South Ossetia," he said.
"It's also a sign perhaps of how unwilling Georgia is to be drawn into a full-scale conflict, knowing very well that that would jeopordise its cherished chances of joining Nato."
Fighting between Georgian soldiers and forces from the breakaway region of South Ossetia wounded up to 20 people on Thursday.
Both sides blame each other for the conflict.
Casualties
The de facto government in Tskhinvali, the South Ossetian capital, said that 18 people had been wounded by Georgian fire.
Marina Salukvadze, a spokeswoman for Temur Yakobashvili, the Georgian re-integration minister, said two Georgian servicemen were also wounded after attacks on Georgian positions by South Ossetian forces.
Tensions over South Ossetia and another breakaway Georgian region, Abkhazia, have been rising since Russia said it was establishing formal ties with the separatists.
A Russian envoy has arrived in Tbilisi, Georgia's capital.
South Ossetia said that six people had died in fighting over the weekend.