"The last month has been extremely difficult overall, and with the setbacks in the knee recovery," Dumoulin said in a statement https://teamsunweb.com/tom-tdf on the team's website.
"After what happened at the Giro I really wanted to go for it in the Tour, but this week I realised it's not realistic for my level to be there in time.
"I've tried so hard to get there but I really have to listen to my body and release myself from chasing an unrealistic goal."
The 2017 Giro d'Italia winner was expected to challenge defending champion Geraint Thomas of Team Ineos at the Tour which begins in Brussels on July 6.
Britain's four-times Tour winner Chris Froome has been ruled out of the race after sustaining multiple fractures after a crash in the Criterium du Dauphine.
Team Sunweb physician Anko Boelens said it was simply "not possible" for Dumoulin to compete in the Tour.
"We trusted in the process of rest, recuperation and a gradual return to racing but like in any recovery, there have been setbacks," Boelens said.
"Time isn't on our side anymore to cater for setbacks so to give Tom the time he needs to get back to complete fitness can only be the right decision.
"Despite his strong will and ambition to race... it's better to let this goal go this year in favour of optimum recovery."
(Reporting by Shrivathsa Sridhar in Bengaluru, editing by Ed Osmond)
