"After competing in Abu Dhabi, I realised that although I am super close, I'm not where I personally want to be", Williams added. She remained hopeful of making a return to Australia and defend her title but admitted that it's a tough task and therefore, made a decision to walk out.
The 23-time major victor and women's titleholder gave birth to her first child last September and says she's not yet ready for a comeback.
On Thursday, Britain's Andy Murray pulled out of the tournament, which starts on 15 January.
"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.
The 23-time grand slam victor returned to the court at the Mubadala World Tennis Championship in Abu Dhabi at the weekend, less than four months after becoming a mum, but playing that tournament has given the American pause for thought.
Williams began last year's Australian Open one week after learning she was pregnant.
"Serena transcends the sport in the way she approaches all aspects of her life".
"I can compete - but I don't want to just compete".
The 12-time Grand Slam victor had a forgetful 2017 season.
There is also uncertainty over whether former champions Novak Djokovic, Stan Wawrinka and Rafa Nadal, the latter of which arrived in Melbourne earlier on Friday, will be fit to take to the court. Venus Williams, defending champion Johanna Konta, and French Open champion Ostapenko are also all set to be in action. There is no word yet on when she will be, but Miami in March may be a good bet.