"Shane has not fully recovered from his right calf injury and is therefore not available for the Sydney Test," team physiotherapist Alex Kountouris said.
"He will continue his rehabilitation and hopefully be available for one of the remaining Test matches."
Harris was regarded as Australia's No.1 quick before his injury absence.
But the excellent performances of James Pattinson, Peter Siddle and Ben Hilfenhaus in the first Test victory have cast doubt on whether Harris can dislodge one of the incumbents.
However, Australia captain Michael Clarke on Thursday said selectors would consider the possibility of playing four pacemen at the SCG, in which case offspinner Nathan Lyon would be dumped.
Watson's continued absence ensures the six batsmen from the MCG Test will be retained, although the strong performances of Ricky Ponting and Mike Hussey in Melbourne had already shored up their spots.
Wicketkeeper-batsman Brad Haddin is also on safe ground, despite his continued poor form.
Chairman of selectors John Inverarity said the team would take great confidence and momentum into the second Test and he welcomed Harris' return to the squad, after a four-Test absence.
"Ryan has had carefully monitored preparation, which has gone to plan," Inverarity said.
"Mitchell Starc and Daniel Christian, who were both in the squad for the first Test, have been omitted but remain very much in our thinking."
Australia: Michael Clarke (capt), Brad Haddin, Ed Cowan, Ryan Harris, Ben Hilfenhaus, Mike Hussey, Nathan Lyon, Shaun Marsh, James Pattinson, Ricky Ponting, Peter Siddle, David Warner (12th man to be named).
- AAP
