The 21-year-old Marsh, who played his only one day international in 2011 against South Africa, was rewarded with a place in the 15-member squad for his strong domestic limited over performance for Western Australia.
"Mitchell's domestic season was interrupted by (hamstring) injury but there's no doubt he has the potential to perform strongly at international level," national selector John Inverarity said.
Fast bowler Nathan Coulter-Nile and his Western Australia team mate Adam Voges also made it to the squad, who will begin their Champions Trophy campaign against hosts England at Edgbaston on June 8.
Twenty20 captain Bailey was named vice captain, stepping in after all-rounder Shane Watson stepped down from the post last month.
"The NSP (National Selection Panel) has been impressed with George's leadership when he stepped in to guide the ODI team in Michael's absence last summer and leadership of the T20 team over the past two seasons," Inverarity said.
"Given George's experience and credentials, he was viewed as the ideal person for the role."
Steve Smith, Aaron Finch and Moises Henriques were "close to selection", while paceman Ben Cutting was not considered because of injury concerns, Inverarity said.
Pacemen Mitchell Starc and Clint McKay were recovering well from injury and would join Mitchell Johnson to form the core of the limited-overs bowling group, he said.
"The ICC Champions Trophy is another important step in our aim to get back to the number one ranking," Inverarity said.
"As the two-time defending champion, the squad has been selected with the aim of winning the tournament ... while also keeping the 2015 ICC World Cup firmly in mind."
Squad: Michael Clarke (captain), George Bailey, Nathan Coulter-Nile, Xavier Doherty, James Faulkner, Phillip Hughes, Mitchell Johnson, Clint McKay, Mitchell Marsh, Glenn Maxwell, Mitchell Starc, Adam Voges, Matthew Wade, David Warner, Shane Watson.
- Sports & Recreation
- John Inverarity
- Adam Voges
- Western Australia
- Mitchell Starc