Williams has not played since suffering a torn hamstring at Wimbledon in June.
The 40-year-old stated last month that she was "better" and planned to play in the first grand slam of 2022 at Melbourne Park.
Williams will not go in search of a record-equalling 24th major title next month, though, revealing she is not fit enough to take her place in the draw.
She said in a statement: "Following the advice of my medical team, I have decided to withdraw from this year's Australian Open. While this is never an easy decision to make, I am not where I need to be physically to compete.
"Melbourne is one of my favourite cities to visit and I look forward to playing at the AO every year. I will miss seeing the fans but am excited to return and compete at my highest level."
The legendary American's last grand slam triumph came at the Australian Open in 2017.
While Williams will not compete, world number one Ash Barty will participate, as will US Open champion Emma Raducanu and four-time grand slam winner Naomi Osaka.