Wigan Warriors skipper O'Loughlin suffered a quad strain in the Super League Grand Final on October 11, but remains in contention for England's second game - against Australia next Sunday.
Coach Steve McNamara told England TV: "He's tried our best and our medical staff have tried their best but I think it was right that we made an early decision on Sean.
"We don't want to push him too hard, too early. Hopefully he gets an opportunity to be available for selection next week."
Hull FC's Joe Westerman replaces O'Loughlin in England's 17-man matchday squad and is one of four debutants together with Wigan Warriors scrum half Matty Smith, Hull KR hooker Josh Hodgson and Daryl Clark, the Super League Man of Steel who will join Warrington Wolves from Castleford Tigers from 2015.
Westerman and Clark will start on the bench, but McNamara is confident all of his new caps will shine.
"It's a blow [to lose O'Loughlin]," added McNamara. "He's our captain, our leader and he's obviously a really good player, so he's going to be a loss to us, but we're really happy with the replacement in Joe Westerman. Joe's had a great season for Hull FC; he's been a real stand-out for them.
"I think they [England's four debutants] are ready. They are players that have been in our system for a while. They are players who have been in great form in Super League. Four very exciting young players."
On stand-in skipper Graham, McNamara said: "James is a tremendous leader. I think we saw that with the [Canterbury] Bulldogs at the back end of the [NRL] season, where he more or less single-handedly led them towards the Grand Final, and nearly Grand Final success.
"He leads by example, there's 100 per cent effort in everything that he does. He just inspires everybody else to follow his lead."