Knights and dames were unexpectedly revived last year by then prime minister, and staunch monarchist, Tony Abbott - prompting accusations he was in a "time warp" and out of touch with voters.
Turnbull, an outspoken republican, had been widely expected to dump the titles ever since he replaced Abbott in a conservative Liberal Party room coup in September.
"The cabinet recently considered the Order of Australia... and agreed that knights and dames are not appropriate in our modern honours system," Turnbull said in a statement.
"This change will not affect existing knights and dames," he added.
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Abbott's reintroduction of knights and dames in 2014 was questioned, but it was his subsequent decision to knight Queen Elizabeth II's husband Prince Philip which was met with ridicule and disbelief.
"I just think giving our top award to a British royal is anachronistic," Labor opposition leader Bill Shorten said at the time.
"To be honest it's a bit of a time warp. I wasn't quite sure it was serious until I realised it was."
The mis-step over Prince Philip's knighthood was seen as one of the catalysts for a leadership challenge against Abbott in February, adding to flagging opinion polls and an unpopular budget. He survived but was removed by Turnbull's challenge seven months later.
He has since admitted the decision was a mistake, describing it as "an injudicious appointment, obviously".
Knights and dames were introduced into Australia's system of honours in 1976 by then-prime minister Malcolm Fraser, but abolished a decade later by Bob Hawke. Previously, Australians had been honoured through British imperial awards.