The decision - long rumoured but confirmed in Tuesday's federal budget - will save the federal government almost $200 million over nine years.
The ABC was awarded the $223 million 10-year contract in 2011 to broadcast news and entertainment programs into Asia.
The network is funded by the Department of Foreign Affairs and Trade as a tool of "soft" diplomacy by promoting Australia in the wider region.
But the government pointed to the ABC's failure to fulfil this charter as justification for ending the contract.
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"The Australia Network has failed to deliver a cost-effective vehicle for advancing Australia's broad and enduring interests in the Indo-Pacific region," Foreign Minister Julie Bishop said in a statement on Tuesday.
She also criticised the "fundamentally flawed" tender process that saw the ABC awarded the contract over Sky News.
The network came under fire earlier this year when it aired ABC reports claiming the navy abused asylum seekers.
Senior government ministers - including Ms Bishop - expressed concerns about the nature of content being broadcast to the region, and called for a review of the network.
