The former world No 1 last week played her first match since giving birth in September.
Serena Williams, a 23-time Grand Slam winner and the reigning Australian Open champion, said: “Although I am super close, I’m not where I want to be.”
On January 4, Andy Murray pulled out of the tournament, which starts on January 15.
Serena Williams, 36, was eight weeks pregnant with daughter Olympia when she won her seventh Australian Open title in 2017.
The now world No 22 said: “My coach and team always said ‘only go to tournaments when you are prepared to go all the way’.
“I can compete – but I don’t want to just compete, I want to do far better than that and to do so, I will need a little more time.
“The memory of last year’s Open is one that I will carry with me, and Olympia and I look forward to coming back again.”
Australian Open tournament director Craig Tiley said: “I’ve been in constant contact with Serena and her team and know this is why she has pushed it and pushed it until the 11th hour to make her final decision.
“Serena transcends the sport in the way she approaches all aspects of her life. It was never going to be good enough for her to just compete.”
Serena Williams lost an exhibition contest against Jelena Ostapenko in Abu Dhabi on December 30, 2017, in her first match since giving birth in September.
It is the first time since 2011 that Serena Williams has missed the tournament.
On January 4, men’s world No 4 Kei Nishikori withdrew because of a wrist injury.
There are also doubts over the fitness of No 1 Rafael Nadal and Switzerland’s Stan Wawrinka, who won the title in 2014.
Novak Djokovic, a six-time Australian Open champion, may also miss out with an elbow injury.
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