The White House has announced the presidential visit has been rescheduled to June and says Mr Obama “deeply regrets” the delay.
But analysts say the postponement of the trip comes as no surprise, because his presidency is hanging in the balance.
The warning signs were all there. Mr Obama had already delayed his trip to Indonesia and Australia by three days and had cut short the Australian leg to just 24 hours.
But he let White House spokesman Robert Gibbs deliver the bad news.
“The president telephoned the leader of Indonesia and will call the leader of Australia later this afternoon and told them that he must postpone his planned visits for a later date, so that he can remain in Washington for this critical vote,” he said.
Prime Minister Kevin Rudd has told Channel Seven that Mr Obama rang him this morning to discuss the trip.
“I’m going to be very happy any time the president chooses to visit,” he said.
“As I said the other day, I’m pretty relaxed about all that.
“I know President Obama pretty well. It’ll be nice to have he and Michelle and the kids.
“We had a conversation on the phone this morning – he’d like to have a more relaxed visit than the 24-hour whip in, whip out that the last one had come down to.”
Foreign Minister Stephen Smith has told Radio National the Government is disappointed but understands why Mr Obama is not coming.
He says details will still have to be fleshed out over the proposed June trip.
And he denies that the postponement of Mr Obama’s trip, as well as the cancellation of secretary of state Hillary Clinton’s trip earlier this year, will be damaging to the relationship.
“None of these events goes to the strength of the alliance relationship or to the strength of the engagement either between the president and the Prime Minister, or Defence Minister John Faulkner and the secretary of defence Gates, or indeed myself or Hillary Clinton,” he said.
This was going to be Mr Obama’s first foreign trip of the year but it has fallen victim to an intense political battle over his signature domestic policy issue – a push to overhaul America’s health care system.
“The president greatly regrets the delay,” Mr Gibbs said.
“Our international alliances are critical to America’s security and economic progress.
“The passage of health insurance reform is of paramount importance and the president is determined to see this battle through.”
The US House of Representatives is now going to vote on those health care reforms in the early hours of Monday morning Australian time, just hours after Airforce One was due to take off.
“We did not want at 10:00 on Sunday morning to make a call to the Indonesians and Australians and say, ‘I know we were going to be there in a matter of hours, but we’re not going to be there’,” Mr Gibbs said.
“I think that would cause some problems, just on common sense and manners.”
It is not the first time a president has cancelled an overseas trip. Former US president Bill Clinton pulled out of the APEC summit in Malaysia.
Darrell West, vice president of governance studies at the Brookings Institution, says it is no surprise that the trip has been postponed.
“Australia should not take it personally because it really has nothing to do with Australia or even foreign policy,” he said.
“Healthcare is the most important domestic initiative for the president and if he is not able to get that legislation passed, it’s going to have dramatic negative consequences for the rest of his presidency.”
The White House is confident Democrats have the votes to pass the health care reforms.
Mr West believes it will go down to the wire.
“Obviously if the president is staying in the United States to keep lobbying, it means they’re down to needing a handful more votes,” he said. “So it’s not a done deal.”
The White House says Mr Obama’s trip to Australia and Indonesia will go ahead in June but there is as yet no word on whether he will take his family with him.