The big-serving Isner injured his right knee at the Hopman Cup in Perth last week.
He had to withdraw from that event before struggling in a straight sets loss to fellow American Ryan Harrison 6-4 6-4 in his first match at the Sydney International on Wednesday.
Australian Open organisers said Isner had bone bruising of the knee.
"Doctors have told me that continuing to play on the knee could result in a more serious injury," Isner said.
Isner will be replaced in the Open main draw to be conducted on Friday by a lucky loser from the last round of qualifying.