Oracle boss Sir Russell Coutts has confirmed Team Australia intends to withdraw from the America's Cup.
The syndicate was the Challenger of Record under the flag of the Hamilton Island Yacht Club, Australia.
''We are very disappointed to be receiving this news,'' Coutts said.
There has been speculation of uneasiness about the direction the regatta was taking, though Team Australia was involved in the protocol process as the Challenger of Record alongside holders Oracle.
"We were excited to have Australia as a challenger and we were also looking forward to the prospect of holding America's Cup World Series events in Australia," Coutts said.
Team New Zealand said the challenger's withdrawal was another demonstration of how tough the game was.
When announcing their intention to withdraw, the Hamilton Island Yacht Club said money was an issue.
"The Challenge was initiated with a view to negotiating a format for the 35th America's Cup that was affordable and put the emphasis back on sailing skills.
"Ultimately our estimate of the costs of competing were well beyond our initial expectation and our ability to make the formula of our investment and other commercial support add up."
Team New Zealand boss Grant Dalton was disappointed Team Australia was backing out.
''It's a shame to lose the Australians. They won the Cup in 1983 which opened the door to the first New Zealand challenge in 1987."
Dalton said Team New Zealand was on track to compete.
''We have the class rule and the design team is well into its programme; the sailing team continues to compete successfully overseas, with great recent results by Dean Barker and Glenn Ashby in the A-class cats worlds and Peter Burling and Blair Tuke still dominating the 49er scene.
"In addition, we have never been in better shape with potential sponsors."
The only challenger entries to-date believed to be confirmed were Prada (Italy) and Artemis Racing (Sweden). Artemis were Challenger of Record at the last America's Cup.
Team New Zealand have signalled their intentions, though their first test would come with the entry deadline and the US$1 million (NZ$1.15m) fee.
There was still no final venue with a decision between Bermuda and San Diego expected before the end of the year.
Team New Zealand and Sir Ben Ainslie's British syndicate have aired frustrations over that delay as they seek sponsorships.
Bermuda wasn't favoured by the challengers who also aired disappointment that San Francisco had been rejected.
Ainslie issued a brief statement on Team Australia's exit: "While the withdrawal of the Challenger of Record is regrettable, it is also not unusual and we will continue our own preparations for the 35th America's Cup and look forward to an exciting future."
A similar situation occurred in the 34th America's Cup, when Golden Gate Yacht Club accepted a Challenge from Yacht Club di Roma (Mascalzone Latino).
The Italians also pulled out, citing financial problems.
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