The all-rounder was set to appear for Michael Clarke's side for their one-day international series against the hosts and South Africa, but Watson rolled his ankle on a cricket ball at training in Brisbane on Wednesday.
Watson's last-minute omission has seen a reprieve for Phil Hughes, who was left out of the original squad despite making a record-breaking 202 for Australia A against India A in a 50-over match in July.
"Shane today unfortunately sprained his right ankle at training, damaging an ankle ligament. His ankle is currently swollen and sore, but expected to recover with a period of rest," Australian team physio Alex Kountouris said in a statement.
"Due to the compact nature of the tour, we've made a decision that Shane would be unlikely to recover sufficiently in time for the series.
"He will return to Sydney in coming days to continue his recovery and be ready for the Tour of the UAE."
Selector Rod Marsh said Hughes was the obvious replacement for the injury-prone Watson.
"As I've said previously, Phil was unlucky not to be picked in the initial squad after showing some great form in the Australia A Series and was the natural choice to come in for Shane," Marsh said.
Australia open their tour against Zimbabwe in Harare on August 25.