Currently ranked No. 2 in the world, Day has not played since the Presidents Cup. His wife, Ellie, gave birth to the couple's second child, Lucy, last week near the couple's home in Ohio. The Aussie was expected to make his return to competition at the 18-man event, but the tournament announced his withdrawal on Friday.
Watson will take his place, and in so doing will make his sixth straight appearance in the tournament. He has made only one start during the new wraparound season, finishing T-35 in defense of his title at the WGC-HSBC Champions.
Day is still expected to defend his title next month at the Franklin Templeton Shootout in Naples, Fla., where he teamed with Cameron Tringale en route to victory a year ago.
The Hero World Challenge will be held Dec. 3-6 at Albany in The Bahamas.