Only three other non-Australian cricketers, Clive Lloyd, Gary Sobers and Brian Lara, have been made members in the past while Tendulkar will also be only the second Indian to receive the honour after attorney general Soli Sorabjee, who was conferred the membership in 2006.
Australian Prime Minister Julia Gillard said in New Delhi: "We are both cricket-mad nations. I'm very pleased we're going to confer on Sachin Tendulkar membership of the Order of Australia, an AM."
He added: "This is a very special honour, very rarely awarded to someone who is not an Australian citizen or an Australian national."
Tendulkar is currently in South Africa playing in the Champions League T20 for the Mumbai Indians and will receive the award on his return to India from cabinet minister Simon Crean, who is scheduled to visit the country soon.
"He is away playing cricket - surprise, surprise - but the award will be conferred on him by minister Crean when [he] visits India. So a very special honour and a very special recognition of such a great batsman," Gillard said.
Tendulkar holds the record for playing the most matches against Australia, 106 across all formats of the game.
The 39-year-old is also second on the list of highest run-scorers against Australia in Test matches.
Jack Hobbs leads the chart with 3636 runs in 41 matches and Tendulkar, who has 3438 runs from 35 games, will have a chance to go past the England great when Australia tour India in February.