The American 23-time Grand Slam winner made a tentative return at an Abu Dhabi exhibition late last month, losing to French Open champion Jelena Ostapenko.
Prior to that her last competitive match was at the Australian Open final almost a year ago, which she won despite being two months pregnant, memorably beating sister Venus in the decider.
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Since then, she has given birth to her first child and married Reddit co-founder Alexis Ohanian at a star-studded wedding, where guests included Beyonce and reality TV star Kim Kardashian.
"After competing in Abu Dhabi, I realised that although I am super close, I'm not where I personally want to be," the 36-year-old said in a statement. "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.”
She added: "With that being said, and even though I am disappointed about it, I've decided not to compete in the Australian Open this year."
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In Abu Dhabi, Williams was clearly sluggish and had problems with her serve. She also stuck mostly to the baseline and only twice charged the net.
The decision means her tilt at matching Margaret Court, who boasts 24 major titles and is renowned as the most successful player in Grand Slam history, must wait.
It also deprives the opening Grand Slam of the year of another major star, after former world number one Andy Murray and Japan's Kei Nishikori both withdrew injured on Thursday.
Australian Open tournament director Craig Tiley expressed his admiration for Williams' efforts to return to the game she loves.
"The true champion Serena is has been demonstrated in the Herculean efforts she has made over the past few months in her desire to play the Australian Open," he 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 eleventh hour to make her final decision. We all wish her the very best and I look forward to seeing her back on court this year, and can't wait to welcome her back to the Australian Open in 2019."
The Australian Open starts in Melbourne on January 15.
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