He announced his retirement in a press conference, thanking his family for their support during his political career.
"I really do regret and it has broken my heart to have to do this," he said.
"It's gut-wrenching and I wouldn't be doing it - if it just wasn't absolutely necessary to do it now."
Dr Kelly recalled how no region had "suffered more" than his electorate - bearing much of the brunt of the drought and this summer's bushfire crisis.
"They deserve to be prioritised right now," he said.
"Now it's time to get back to work and focus on the national interest and the crisis in front of us."
Labor Leader Anthony Albanese called Dr Kelly a "great Australian", thanking him for his years of service and passion for his electorate.
"Mike Kelly is an extraordinary Australian, and he has brought a great deal of dignity, talent, capacity and commitment to this parliament," he said.
He told SBS News earlier this year he was determined to stay on in federal politics as long as he could.
Dr Kelly was first elected to his seat in 2007.
NSW Deputy Premier John Barilaro, NSW Transport Minister Andrew Constance and Liberal senator Jim Molan have all been touted as possible coalition candidates.
But Mr Barilaro says a three-cornered contest isn't in the coalition's best interests.
Mr Barilaro says he wouldn't run against Mr Constance, and will speak with his family over the weekend about having a tilt at federal politics.
"I can't rule it out, don't rule it in," he told Sky News.
"Everybody's got to be honest with themselves and it will be something that I'll weigh up over the next few days."
Mr Barilaro's state electorate covers the Queanbeyan area, where the majority of the Eden-Monaro population resides.
"If I do this, I do this knowing I could be out of politics," he said.
Liberal senator Jim Molan says he's considering all options.
Eden-Monaro was once considered a bellwether seat - going to the party that wins government - but Dr Kelly brought that to an end in 2016.
The electorate also takes in the bushfire-hit town of Cobargo, whose residents gave Prime Minister Scott Morrison an extremely hostile reception earlier this year.