Officials said the American had withdrawn because of complications with a knee problem that was operated on in August.
"She has withdrawn citing rehabilitation of her left knee", Tennis Australia spokesman John Lindsay said.
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She told the Women's Tennis Association that her knee felt good but her training staff had advised her not to play because of the risk of further damage.
"After conferring with my trainers and coaches, we really don't think that I've had sufficient time to prepare and train for it," she said in a statement released by the WTA.
"My knee feels great, but my rehabilitation took a little longer than I expected. I'm on the courts daily, and look forward to coming back in championship form."
The 22-year-old had already withdrawn from the Hopman Cup and the Sydney international but said she had still hoped to make it back for the season's first grand slam, starting in Melbourne on January 19.
Australian Open tournament director Paul McNamee said he was surprised she had pulled out after previously indicating being ready to play.
"I just got a message this morning ... the light on my phone was flashing. I knew when she pulled out of the Hopman Cup something was afoot," he said.
"Her management was continuing to confirm she was going to come to Australia but it wasn't from Serena herself so I was a little bit concerned when she didn't come here (Perth) when she herself had said she was coming."
"Obviously that was always going to affect her preparation for the Australian Open, so there it is."
VENUS COMEBACK
However, her sister Venus is still expected to play in Melbourne after making her comeback at an exhibition tournament in Hong Kong.
Venus, a former world number one but now ranked 11, had also been out of action since Wimbledon with an abdominal tear but made a successful comeback by beating world number nine Chanda Rubin.
"The good news is that Venus is playing well in Hong Kong. So Serena is out but Venus is in -- we will still have a Williams at Melbourne Park," McNamee said.
Serena's withdrawal is massive blow to organisers of the Australian Open, who have already lost some of their biggest drawcards and are in danger of losing more.
Four-times champion Monica Seles has not entered the event and two-time winner Jennifer Capriati, who has been troubled by a back injury, remains in doubt.
There are also concerns about world number two Kim Clijsters after she injured her ankle in the Hopman Cup last week while Jelena Dokic is unlikely to play after pulling out of two warm-up events citing "personal reasons".
