The electro star released a statement saying that health problems meant she could no longer perform at the popular Laneway Festival dates where she was set to headine in January.
"It's been a long time coming, but unfortunately tour life has caught up with me and it's been recommended that I take a break. I'm devastated," she said.
The singer, who has had hits with tracks including 'Gunshot', 'I never learn' and 'No rest for the wicked', said she was determined to come back "stronger" after her rest.
Ariel Pink, Dan Deacon and Iceage are set to perform at the festival to make up for Lykke Li's non-appearance.
The Laneway Festival is one of the most popular one day music events in Australia.
Starting off life as a series of weekly shows at a Melbourne bar, it spread to other cities in the country before going international five years ago.
Lykke Li made headlines in the UK recently when ut was revealed that 'Gunshot' was the most 'Shazamed' song to feature in a UK advert in 2014.
The track – which appeared in Peugeot's recent 108 campaign – was searched for more times than tracks by the likes of Electric Guest, Tom Odell and Clean Bandit.