“I think I'll sit this one out.”

You're at a bar where people are dancing. Your friend invites you to dance, but you don't want to dance because you don't like the song that's playing. You say:

I think I'll sit this one out.

I think I'll (do something)

Use this expression to announce something that you've just decided to do:

I think I'll take a shower.

I think I'll work from home today.

sit this one out

This phrase comes from sports. When you "sit out" a game or a match, you sit outside of the court or field. So sitting something out means that you do not participate.