iiNet said it was prepared to participate in the trial, but has pulled out because it believes the government's definition of "unwanted" websites is too vague and the purpose of the trial is confused.
A spokeswoman for Communications Minister Stephen Conroy, who has been an advocate of the filtering, said the company never raised those concerns during negotiations and the government is confident the trial will still be successful without the company.
Opposition communications spokesman Nick Minchin said the trial is looking less likely, and without Australia's largest Internet providers the trial will lose credibility.
"We're prepared to wait and see what these trials show but the government won't commit to independent auditing," he said. "We have the three biggest ISPs not participating. You've really got to start to doubt the credibility and veracity of this trial itself."
iiNet's managing director, Michael Malone, had said that the company only agreed to participate in the trial to demonstrate that the policy was fundamentally flawed, a waste of taxpayers' money and would not work.
"We are not able to reconcile participation in the trial with our corporate social responsibility, our customer service objectives and our public position on censorship," Malone said. "It became increasingly clear that the trial was not simply about restricting child pornography or other such illegal material, but a much wider range of issues including what the government simply describes as 'unwanted material' without an explanation of what that includes.
"Everyone is repulsed by, and opposed to, child pornography but this trial and policy is not the solution or even about that."