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Five-times a runner up at Melbourne Park, Murray had surgery on the joint a year ago and has been unable to recover his best form.
Overcome with emotion and struggling to hold back tears, the 31-year-old three-time Grand Slam champion told reporters that he had hoped to play until at least this year's Wimbledon tournament.
But he felt the Australian Open might end up being his swansong, given the pain from his hip had become almost unbearable.
"Yeah, I think there's a chance of that, yeah for sure," the Scot said.
"The pain is too much, really ... I'm not sure I'm able to play through the pain for another four or five months.
"The pain is not allowing me to enjoy competing or training or any of the stuff I love about tennis."
Murray said he was mulling another round of major hip surgery but added that it was more aimed at improving his "quality of life" and it might not mean an eventual return to the tour.
"I have an option to have another operation which is a little bit more kind of severe than what I've had before, having my hip resurfaced which would allow me to have a better quality of life," he said.
"That's something I'm seriously considering right now ... Some athletes have had that and gone back to competing but there's obviously no guarantees."
He said basic things in everyday life, like putting on socks and shoes, caused him severe pain and he had grown weary of talking about his hip in every conversation.
Murray, who visibly struggled in a 6-1 4-1 practice match defeat to top seed Novak Djokovic at Melbourne Park on Thursday, has been drawn to play 22nd seeded Spaniard Roberto Bautista Agut in the first round on Monday.
"I'm going to play, I can still play to a level, not a level that I'm happy playing at," he said.