Gillard, currently on a three-day state visit to India, told reporters that Tendulkar deserved the "special honour" because he was a "very special cricketer".
"Cricket is of course a great bond between Australia and India. We are both cricket-mad nations," she said. "I am very pleased that we are going to confer on Sachin Tendulkar the membership of the Order of Australia. "This is a very special honour very rarely awarded to someone who is not an Australian citizen or an Australian national."
The award will be conferred on the 39-year-old Tendulkar during Australian minister Simon Crean's upcoming visit to India, Gillard said.
There was no immediate comment from Tendulkar, who is in South Africa representing the Mumbai Indians team in the Twenty20 Champions League.
Tendulkar has scored a world record Test (15,553) and one-day (18,426) runs and has also compiled an unprecedented 100 international centuries.
West Indies batting great Brian Lara was honoured with the membership of the Order of Australia in 2009. Former attorney-general Soli Sorabjee is the only other Indian to have received the award.
Tendulkar's popularity in Australia was cemented when legendary cricketer Don Bradman said he was reminded of his own batting after watching the Indian play.
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