Kyrgios's long-time physio Will Maher says the 2022 Wimbledon runner-up has a cyst growing on his meniscus.
While it's not a career-threatening injury, Kyrgios is not sufficiently fit to contest his home grand slam.
"I'm obviously extremely disappointed," Kyrgios said.
"Going in as one of the favourites, it's brutal."
He had been due to play Russian Roman Safiullan in the first round on Tuesday night.
The 19th seed's scratching is another hammer blow to the Melbourne Park major, which was already ravaged by superstar withdrawals and retirements.
Women's titleholder Ash Barty, seven-times champion Serena Williams, her sister Venus, dual winner Naomi Osaka and retired legend Roger Federer are all missing in 2023.
Australia's highest-ranked woman Ajla Tomljanovic also pulled out on Saturday with a knee injury.