The NYT is reporting it’s because of Teddy’s health:

On Wednesday she called the governor, David Paterson, who is making the selection of who should succeed Senator Hillary Clinton. Her concerns about Senator Edward M. Kennedy’s deteriorating health (he was hospitalized after a seizure during the inaugural lunch on Tuesday ) prompted her decision to withdraw, this person said. Coping with the health issues of her uncle, with whom she enjoys an extraordinarily close bond, was her most important priority; a situation not conducive to starting a high profile public job.

Yeah riiiiiight.