The 31-year-old all-rounder missed the drawn first Test in Brisbane with a calf injury but had hoped to play as a specialist batsman in the second, which starts on Thursday.
"Once we got here our intent was to give Watto every chance as a very important player and vice captain of the team, but unfortunately we've run out of time," Australia captain Michael Clarke said.
"At this stage we think he's a couple of days short of his best. Our job is to get him fully right and we've now got eight days until the third Test in Perth."
Watson's fitness and availability to play has been a source of heated media speculation in Australia, with team management giving mixed messages about whether he would be considered for selection only as a batsman.
Watson, who averages 37.54 with the bat and has taken 59 wickets in 35 Tests, has been plagued by injuries throughout his career and missed the entire four-Test series against India last year.
Clarke, who as a selector had input into Watson's omission, brushed off media speculation of a rift between himself and his vice captain.
"We have a great relationship firstly," said Clarke.
"I know there's been talk of that being a little bit different but Watto and I, our friendship and our professional relationship when it comes to captain and vice captain, is as close as I can certainly ask for."
Lefthander Rob Quiney, who made nine in his single innings on debut at the Gabba, keeps his place in the side and is again likely to bat at number three.
Paceman Ben Hilfenhaus has also retained his position in the team with left-arm seamer Mitchell Starc again handed the 12th man spot he had in Brisbane.
Although economical, Tasmanian workhorse Hilfenhaus battled for two tail-end wickets at the Gabba and had the least penetration among the fast bowlers, which included James Pattinson and Peter Siddle.
But Clarke took heart from the way they lifted in the second innings, having been put to the sword in the first by century-makers Jacques Kallis and Hashim Amla.
"I think we've got a good combination. We've got a good mixture of aggression but also bowlers who can bowl long spells and dry runs up if required out there on that wicket," he said.
"Generally in Adelaide, you have to bowl quite tight during periods of the game."
South Africa have brought spinner Imran Tahir into their team for Adelaide after their pacemen failed to fire in the first clash in Brisbane.
Tahir was left out of the side for the opening match at the Gabba to make way for Rory Kleinveldt in a four-prong pace-attack that was thwarted by Australia's batsmen, who scored a match-saving total for the loss of only five wickets.
In the only other change from the Gabba team, Faf du Plessis comes in for all-rounder JP Duminy, who was sidelined for six months after rupturing his Achilles tendon in training.
"I think Brisbane was a slight change for us in terms of tactics, but it's back to normal now and we're looking forward to him (Tahir) hopefully playing a big part in this Test," South Africa captain Graeme Smith said.
South Africa's task on a lifeless deck at the Gabba was compounded by the loss of Duminy. All-rounder Du Plessis, a 28-year-old limited overs specialist, makes his Test debut in his place.
"I think Faf is in the same mould bowling as JP (Duminy)," Smith said.
"He can play a role and obviously by picking Imran he will front up for the majority of that spin option, but having Faf available is having someone else in the group who can contribute.
"I think he's had a high standard last few years. He's played a role in the one-day and Twenty20 formats and I know he's really excited to get the opportunity to play Test cricket.
"He's been around this group now since England and he's been part of special times, so I think he's looking to make a mark on this team."
South Africa's number one Test ranking is on the line in the three-match series, which concludes next week at the WACA in Perth.
Australia: Michael Clarke (captain), David Warner, Ed Cowan, Rob Quiney, Ricky Ponting, Mike Hussey, Matthew Wade, Peter Siddle, Ben Hilfenhaus, James Pattinson, Nathan Lyon.
South Africa: Graeme Smith (captain), Alviro Petersen, Hashim Amla, Jacques Kallis, AB de Villiers, Jacques Rudolph, Faf du Plessis, Vernon Philander, Dale Steyn, Morne Morkel, Imran Tahir.