Appearing pale and drained-looking, Thorpe confirmed he would not compete at a press conference in Sydney.
The five-time Olympic gold medallist was one of the event’s major drawcards.
Speaking in a gravelly voice, Thorpe said he was frustrated he would not be able to perform to a home crowd, however he never fully recovered from a bout of bronchitis and a viral infection, and would be unlikely to even qualify for a semi-final in his condition.
"It's very disappointing that I can't be part of the team competing in Melbourne," he told reporters.
"It was difficult coming to terms with not being able to compete but it was, in the end, it was the only decision I could come to."
He said he was concerned about future respitory problems, and the illness had taken such a toll on his body he would be of "little if any benefit to the team".
His withdrawal is a major blow to the Games organisers, already reeling from the news that distance swimmer Grant Hackett would not swim due to shoulder surgery, leaving men's swimming stocks at a low ebb.
Thorpe had major problems with bronchitis as a child, forcing him to miss three months of school.
He had to be extra careful not to over train and make himself sick again.
"I hope this is not something which is recurring and I hope that once I am better I monitor these types of things," he said.
Thorpe will be replaced in the team by Craig Stevens, who will swim the 400m and 1500m events.
The swimmer who takes over Thorpe's 100m and 200m Games events will be decided in the next couple of days.