Head coach Warren Gatland on Wednesday confirmed that arch-finisher Williams, who has a record 57 tries for his country, will start against the Wallabies if fit, as he looks to end his illustrious international career on a winning note.
The 34-year-old Ospreys three-quarter had initially planned to retire from Test rugby following the World Cup in New Zealand, but has been persuaded to say his farewells in front of a partisan Millennium Stadium crowd.
And Newport Gwent Dragons back-rower Lydiate, who was just 12 years of age when Williams made his Test bow against France in 2000, was full of praise for a man who will go down alongside the likes of Gareth Edwards and Gerald Davies as one of the greatest players to ever don the red jersey.
Lydiate said: "The best way to sum him up it to say that he is a legend.
"Whenever he gets his hands on the ball you always think that something will happen and to play alongside him has been awesome.
"When I have played against him for the Dragons against the Ospreys you always think 'oh no' because you know that he can score tries from nothing,
"He has been class for Wales and the Ospreys."
Gatland had earlier confirmed that Williams will be among the 26-man panel he names on Sunday, and is set for a place in the staring XV.
"Shane is playing well at the moment, we will be selecting him on Sunday and we want him to start against the Wallabies," said the New Zealander.
"He has been a magnificent servant, not just to Welsh rugby, but to the world game and fans who believe he deserves a magnificent send-off will not be disappointed.
"This game is important to us, it will help us put the disappointment of those final two matches in the World Cup behind us and can be a springboard to our 2012 Six Nations campaign."
But Gatland says he will resist any temptation to try to persuade Williams to return in the future, as he looks to build towards the 2015 World Cup in England.
"Shane is still playing very well and you never say never as a coach, but if was the first game of the Six Nations we would be selecting players who we know will be around for the next Rugby World Cup and he would not be in that category," said Gatland.
"In the new year the philosophy will very much be to start planning for 2015, so if fans want to see the top try-scorer Welsh rugby has ever seen in international action for one last time at the Millennium Stadium, then this game with the Wallabies should be their final opportunity."
Next month's assignment against the Wallabies sees Wales looking for revenge following their 21-18 defeat in the third place play-off at the World Cup, where Gatland's young side excelled in reaching the semi-finals.
The sides will then meet another three times when Wales head Down Under next summer, and Lydiate, who is set to shake off an ankle problem to feature, feels it is vital that the hosts even the ledger after defeat in Auckland.
"We have them in another three Tests next year and they have a leg up on us, so we will be looking to even up the score especially as it's our first game after the World Cup," he said.
"That's what we expect as a group, we don't just want to go out there and compete we want to get that win and play the brand of rugby we want to play.
"We know the fans were turning up in their thousands to watch our games on the big screen in the stadium so we want to do it for them."