The former England skipper, who captained his country 14 times, has been dropped after an ineffective display during the thrilling 31-28 victory over New Zealand that ended with him being substituted.
Neil Back reclaims the open-side flanker's position, so Richard Hill switches to number eight instead of Dallaglio, and Lewis Moody retains his place after a try-scoring display against the All Blacks.
Dallaglio would undoubtedly have led the team out in front of a capacity 75,000 crowd, as the 13th England player to win 50 caps.
On Saturday, Dallaglio finds himself on the bench alongside fellow Lions Danny Grewcock, Jason Leonard, Mark Regan and Austin Healey.
Second-row forward Grewcock, having also failed to shine against the All Blacks, makes way for Leicester lock Ben Kay, who is among four Tigers forwards in the pack.
It was Kay's dramatic late line-out steal from a New Zealand throw that helped save the day, after England came perilously close to blowing their 31-14 lead and collapsing against the Tri-Nations champions.
England boss Clive Woodward has otherwise named an unchanged side, ''99.9% certain'' that centre Will Greenwood and prop Phil Vickery will be fit after minor injuries.
''It was a big call between Back and Dallaglio before the New Zealand game,'' Woodward said, and underlined that the form of Moody and Hill made them automatic selections to face Australia.
''We are not rotating things here. Lawrence is very disappointed, but he is on the bench, and we will go from there. We feel that Lawrence just needs a few more games to get back to his best."
Elsewhere, Gloucester wing James Simpson-Daniel will win his second cap, while scrum-half Matt Dawson has resisted Andy Gomarsall's challenge, although Gomarsall is on the bench, with fellow back-division substitutes Healey and Tim Stimpson.
Saracens centre Ben Johnston, a half-time replacement for Greenwood against New Zealand, drops out of the England 22.
England, having toppled the All Blacks, are looking to make it 17 Tests unbeaten at fortress Twickenham.
They beat Australia on the Wallabies' last two London visits in 2000 and 2001, and the injury-hit World Cup holders have arrived from Dublin, where they suffered a shock 18-9 defeat to Ireland last Saturday.
ENGLAND: J. Robinson (Sale Sharks); J. Simpson-Daniel (Gloucester), W. Greenwood (Harlequins), M. Tindall (Bath), B. Cohen (Northampton); J. Wilkinson (Newcastle), M. Dawson (Northampton); T. Woodman (Gloucester), S. Thompson (Northampton), P. Vickery (Gloucester), M. Johnson (Leicester, capt.), B. Kay (Leicester), L. Moody (Leicester), N. Back (Leicester), R. Hill (Saracens).
Replacements: M. Regan (Leeds), J. Leonard (Harlequins), D. Grewcock (Bath), L. Dallaglio (Wasps), A. Gomarsall (Gloucester), A. Healey (Leicester), T. Stimpson (Leicester).