The 33-year-old missed Australia's recent tour of Zimbabwe with an ankle problem but was set to return in the three-format series against Pakistan in the Middle East.
However, an issue with his right calf has halted his progress and the all-rounder will now be forced to sit out of the tour.
His absence will give fellow all-rounder Mitchell Marsh a chance to make his Test debut, with the 22-year-old already in the touring party after solid performances in the recent tri-series against Zimbabwe and South Africa.
Ben Hilfenhaus has been called in to replace Watson in the Tests, and Kane Richardson will play in the Twenty20 and one-day international teams.
Cricket Australia physiotherapist Alex Kountouris commented: "While Shane has made steady progress with his rehabilitation after he stepped on a ball and sprained his ankle, he has suffered a setback, experiencing some right calf soreness.
"As Shane has previously had similar calf injuries, we plan to hold back his return to running and bowling for approximately 7-10 days.
"The unfortunate timing of this calf injury will mean that his preparation for the UAE tour will be considerably affected and he would have been unavailable for the T20 and ODI part of the tour and significantly limit his bowling preparation for the Test matches."
Watson admitted he was frustrated by his latest injury setback but conceded it was the right decision to sit out the trip to the UAE.
"I'm naturally disappointed because I was desperate to play against Pakistan which is our opportunity to get back to number one in Test and one-day international cricket.
"Despite my strong desire to be on the tour, I understand why the selectors have made this decision.
"Given I can't be with the boys, my goal now is to work as hard as I can to get back to 100 per cent fitness so that I can make myself available for selection ahead of our series against South Africa in November."