The 36-year-old, who won last year's Grand Slam title at the Melbourne Park, made a comeback to the tennis last week just four-and-a-half months after giving birth to her baby girl Alexis Olympia Ohanian Jr.
In September, Serena had revealed that she had set an 'outrageous' goal of making a comeback at the Australian Open, something which will push her Grand Slam total to an all-time record-tying 24 titles.
However, Serena now said that she is not fully ready to return for the season-opening Grand Slam as she believes her preparations had fallen just short of what she needed to be competitive.
"After competing in Abu Dhabi I realised that, although I am super close, I'm not where I personally want to be," the Guardian quoted Serena, as saying.
"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. Even though I am disappointed about it, I've decided not to compete in the Australian Open this year," she added.
Meanwhile, Australian Open tournament director Craig Tiley expressed his admiration on Serena's efforts to return to the game she likes.
Tiley further pointed out that Serena always want to give her absolute best and that she doesn't head into any event just to compete.
"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," he said.
"This is why she has pushed it and pushed it until the eleventh hour to make her final decision," Tiley added.
Earlier, former world number one Andy Murray had also pulled out of Australian Open after failing to recover fully from a hip injury.
Murray joined Japanese star Kei Nishikori, who has been out of competitive action since last August after suffering a wrist injury during a practice session at Cincinnati and has also pulled out of the season-opening Grand Slam.