Lee has been playing with a sore hand since the middle of June and had said he was on the fence about participating in the derby.
After team trainers examined the hand this weekend, they gave Lee the recommendation that he rest his hand as much as possible during the All-Star break.
"I talked to the trainers about it, and they said it would be a good idea to rest it a little bit during the All-Star break," Lee said. "Don't take many swings.
"It's a little sore. I want to make sure I don't aggravate it. It takes a while to warm up and get loose, but it doesn't affect my swing."
Brewers manager Ned Yost said Lee's hand was nothing more than sore and made it clear that the decision wasn't Lee's alone.
"It's everybody's choice," Yost said.
Lee participated in last season's Home Run Derby at Comerica Park in Detroit. He hit 11 home runs in the first round and advanced to the semifinals before finishing third after hitting only five home runs in his last round.
Resting his sore hand might be only one of the reasons Lee chose to miss the Derby. After storming out to 22 home runs before last season's All-Star break, Lee's production slowed in the second half of the season, hitting 10 home runs after the break.
Lee said last season that the Derby might have affected his swing in the second half, which might help explain his nonchalance about missing the derby.
"I don't mind [missing the competition]," Lee said. "Home Run Derby is a lot of fun. If you do it, it's good, but if you don't, it's not like it's a big deal."
John Sahly is an associate reporter for MLB.com. This story was not subject to the approval of Major League Baseball or its clubs.