The 23-time Grand Slam victor defeated her sister Venus in last year's Australian Open 6-4 6-4 and had a second consecutive title in her sights when the tournament started later this month.
The American 23-time Grand Slam victor made a tentative return at an Abu Dhabi exhibition late last month, losing to French Open champion Jelena Ostapenko.
"We are fully aware that some players are going through a hard period with injuries and that they have done everything possible to prepare for the Australian summer", Australian Open tournament director Craig Tiley said while talking to The Dependent.
"I can compete - but I don't want to just compete".
"With that being said, and even though I am disappointed about it, I've decided not to compete in the Australian Open this year".
The 36-year-old had been planning to try and defend the title she claimed last year, for the seventh time in her superb career.
"The memory of last year's Open is one that I will carry with me and Olympia and I look forward to coming back".
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The American tennis star had had a baby girl about four months ago and hasn't played competitive tennis since winning the Australia Open 2017 during which she was pregnant.
It is the first time since 2011 that Williams has missed the tournament.
"Serena transcends the sport in the way she approaches all aspects of her life and consistently gives her all in everything she does". "It was never going to be good enough for her to just compete, she wants to give herself the best chance to win".
On Thursday, Britain's Andy Murray pulled out of the tournament, which starts on 15 January.
Also in the mix will be No. 2-ranked Garbine Muguruza, last year's Wimbledon victor, U.S. Open champion Sloane Stevens and Venus Williams, who will be aiming to win her eighth major singles title at the age of 37.
There are also doubts over the fitness of Spanish world number one Rafael Nadal and Switzerland's Stan Wawrinka, who won the title in 2014.
Garbine Muguruza: the reigning Wimbledon women's champion retired from the Brisbane International with severe cramps but has since been cleared to play in Sydney next week.