Paine had stepped down as Australia's Test captain last week over a sexting scandal.
With this move, Australia's preparations are in disarray for the Ashes 2021-22, due to get underway at Gabba on December 8.
Paine was set to feature in a domestic one-day match for Tasmania in Hobart on Friday in the lead up to the first Ashes Test but will be unavailable for the "foreseeable future", the state's cricket association said.
"Confirming that @tdpaine36 is stepping away from cricket for an indefinite mental health break," Paine's manager James Henderson wrote in a social media post.
"We are extremely concerned for his and (wife) Bonnie’s well-being and will be making no further comment at this time."
Paine quit as Test skipper over the public revelation of an exchange of allegedly sexually graphic text messages with a female colleague in 2017.
While announcing his decision to resign as captain in a press conference, Tim Paine had also said that he would remain available for selection as a wicketkeeper-batter. However, chief selector George Bailey confirmed Paine was no lock for the Ashes while coming back from neck surgery.
Bailey also said he would recuse himself from the decision to select Paine, a close friend and business partner if there was a debate on the selection panel.
Cricket Australia CEO Nick Hockley said Paine had advised the board of his decision to step away from the game.
"We recognise that this is an incredibly difficult time for Tim and his family and are committed to supporting them," Hockley said in a statement.
"We respect and understand Tim’s decision to have a break at this time to focus on his and his family’s well-being."
After this development, uncapped wicketkeepers Alex Carey and Josh Inglis are the frontrunners to take the gloves during the upcoming Ashes. Both of them are not part of Australia’s 15-member Ashes squad but they were named in recent Australia 'A' squad.
Meanwhile, ace pacer Pat Cummins has been appointed as Australia’s 47th Test captain while Steve Smith has also returned to a key leadership role, having been named the vice-captain of the Test team.
(With Reuters inputs)