The long-serving member had been pushing for Ms Le to replace him arguing Labor should be doing more to expand its cultural diversity and that her candidacy would reflect the multicultural electorate.
She now faces a preselection battle against one of Labor's most high-profile members and a former NSW Premier, after Senator Keneally promised to "step up and fight" to win the seat.
Ms Le described the decision as "heartbreaking" but has vowed she won't back down from the contest.
"I'm going to fight for my right to run and for my community," she told SBS News. "We deserve someone who truly understands the struggles of the area."
Australian-born Ms Le is the daughter of Vietnamese refugees who migrated following the fall of Saigon in 1975, with the family settling down roots in Sydney's southwest.
Living in the electorate, her work in the community includes advocating for exploited migrant workers and serving as a youth leader at the Vietnamese Buddhist Youth Association.
Ms Le said she believes that her experience makes her the right candidate to represent the community, which includes the suburbs of Cabramatta, Fairfield and Liverpool.
"This is a bad look for the Australian Labor party," she said. "We are being treated as political pawns that completely sidelines us as a community."
"For me personally it's pretty heartbreaking, considering that I had clearly expressed my intentions to run."
Senator Keneally currently serves as Labor's deputy leader in the Senate and shadow minister for Home Affairs, Immigration and Citizenship.
She now lives on Sydney's northern beaches but held the state seat of Heffron in Sydney's inner-city suburbs during nine years in state parliament.
Senator Keneally on Friday said she had spoken with branch members in Fowler, adding that her decision is motivated by her "passion for social justice".
"Since Chris announced his retirement, I have been approached by ALP branch members urging me to consider nomination for the seat of Fowler," she said in a statement on Friday.
"Serving this community, living in this community, and fighting for them is what I want to do."
Current local MP Mr Hayes told SBS News he continued to support Ms Le's candidacy, describing her as the "most appropriate choice".
"[She's] somebody I consider to represent the aims [and] the directions of our local community," he said. "Someone who is indeed the face of the community - that’s Tu Le."
About 19 per cent of the electorate of Fowler are of Vietnamese heritage.
Mr Hayes said not choosing Ms Le to represent the electorate would be a missed opportunity to increase the party's cultural diversity.
"This is one opportunity we have to actually make sure that we are reflecting that level of diversity in the makeup of our parliament," he said.
Senator Keneally had faced an uncertain future in the Senate amid a factional fight brewing over the top spot on the party’s ticket at the next election.
Senator Deborah O'Neill, who is from the right faction and has the backing of key unions, was expected to lead the Senate ticket ahead of the left's Jenny McAllister.
This meant Senator Keneally, who is also from Labor right, would have been relegated to third spot, which was seen as close to unwinnable.
Labor Leader Anthony Albanese has remained diplomatic about the upcoming preselection battle.
"We will have a very strong candidate for Fowler and Kristina Keneally is an important part of my team," he told reporters on Friday.
Labor holds the seat with a 14 per cent margin.