"Australia's longest war is ending, not with victory, not with defeat, but with, we hope, an Afghanistan that's better for our presence here," Abbott said.
He flew to the Australian Defence Force (ADF) mission in remote Uruzgan province on Monday to make the announcement on the withdrawal which he said was a "bitter-sweet moment for Australia".
"Sweet because hundreds of soldiers will be home for Christmas. Bitter because not all Australian families have had their sons, fathers and partners return," he said at the main base of Tarin Kot.
In an official statement released Tuesday, Abbott said the mission had been critical to Australia's national security.
"We have worked to ensure Afghanistan does not again become a safe haven for terrorists and have worked with our allies to make the world a safer place," he said.
"People have paid a high price. We have lost 40 of our best."
More than 20,000 Australians have served in Afghanistan, with 40 killed in action and 260 wounded since 2001 when Australia joined close ally the United States to fight the Taliban and Al-Qaeda.
"Australians don't fight wars of conquest. We fight wars of freedom," Abbott said.
"We fight for peoples' right to live their own lives and to worship in their own way."
Abbott underlined that Australia left a legacy of 200 schools as well as health clinics and upgraded roads.
He reaffirmed Canberra's commitment to support Afghanistan in the future, notably by training Afghan National Security Forces and development assistance. Several hundred Australians will continue to serve in non-combat roles in the country.