This comprehensive review systematically explores the multifaceted applications, inherent challenges, and promising future directions of artificial intelligence (AI) within the medical domain. It meticulously examines AI's specific contributions to basic medical research, disease prevention, intelligent diagnosis, treatment, rehabilitation, nursing, and health management. Furthermore, the review delves into AI's innovative practices and pivotal roles in clinical trials, hospital administration, medical education, as well as the realms of medical ethics and policy formulation. Notably, the review identifies several key challenges confronting AI in healthcare, encompassing issues such as inadequate algorithm transparency, data privacy concerns, absent regulatory standards, and incomplete risk assessment frameworks. Looking ahead, the future trajectory of AI in healthcare encompasses enhancing algorithm interpretability, propelling generative AI applications, establishing robust data-sharing mechanisms, refining regulatory policies and standards, nurturing interdisciplinary talent, fostering collaboration among industry, academia, and medical institutions, and advancing inclusive, personalized precision medicine. Emphasizing the synergy between AI and emerging technologies like 5G, big data, and cloud computing, this review anticipates a new era of intelligent collaboration and inclusive sharing in healthcare. Through a multidimensional analysis, it presents a holistic overview of AI's medical applications and development prospects, catering to researchers, practitioners, and policymakers in the healthcare sector. Ultimately, this review aims to catalyze the deep integration and innovative deployment of AI technology in healthcare, thereby driving the sustainable advancement of smart healthcare.