The 25-year-old second row has been involved in a number of incidents, with a breach of curfew in Perth last week forcing a group of players and team management to agree to send Williams back to New Zealand.
Anthony Boric will replace Williams in the Blues squad for the Super 14 semi-final meeting with the Sharks in Durban on Saturday.
"There is no questioning the talent of the guy," Blues chief executive Andy Dalton told The New Zealand Herald. "We are not looking for clones but Ali has not understood the team dynamic.
"We are disappointed we had to do this but he has not changed his behaviour.
"In my experience, you cannot have ongoing player disruption such as this within a team - even more so when on tour.
"Team protocols are put in place to ensure acceptable behaviour and commitment to your fellow team-mates is adhered to - sadly this has not been the case."
Coach David Nucifora added: "This increased player accountability and leadership has been instrumental in the success of the squad this year - and while both the players and coaching staff have worked to address these issues with Ali - it finally had to come down to what is best for the whole team."