The 39-test Dagg hasn't made the 23-man squad at all, with Beauden Barrett covering fullback from the bench and Malakai Fekitoa viewed as the man who can be injected to provide some punch and X-factor later.
The composition of the back three was arguably the All Blacks only area of uncertainty for Saturday's clash in Sydney and the selectors have rewarded the combination of Ben Smith, Cory Jane and Julian Savea who played so brilliantly in the last test of the June series against England.
The decision carries an element of surprise as expectation was high that Dagg, who was forced to miss the last two tests due to a nagging knee complaint, would be restored to the No 15 jersey which he effectively made his own at the 2011 World Cup.
Head coach Steve Hansen has been reluctant in the past to change pecking orders as a direct result of injury: usually first choice players who are ruled out of action are restored once they recover.
But Dagg's case is a little unusual in that it's debatable whether he's been the country's best fullback for some time now. Smith was the form Super Rugby fullback throughout 2013 - a year in which Dagg's form for the Crusaders was patchy to the extent he was dropped mid-season.
Smith's ability to play on the wing and the long-term injury to Jane meant the All Blacks retained Dagg at fullback where his test form was good without being as impressive as it had been.
Dagg at fullback and Smith and Savea on the wings gave the All Blacks the range of skills they were after. The magic came from Smith and Savea, while Dagg pitched in with his bravery under the high ball, exceptional positional play and huge right boot.
The story in 2014 has been largely similar. The All Black selectors backed themselves to bring Dagg back to the boil in the June series but in the one test he did play, he was poor. The selectors never said as much, but they were almost relieved to be able to leave him out of the next two tests on the basis his leg needed to be rested.
The sad truth about Dagg is that it feels like a long time since he was regularly carving through opposition defences at full tilt.
Smith has been doing exactly that, as has Savea while Jane provided a reminder in Hamilton that he is a world class operator with an intriguing range of skills that are hard for defences to pick.
"It was a tough team to select in many ways because we have a lot of players in good form," said Hansen. "But in the end we selected the group that we felt could get the job done.
"An example of that is Ben Smith. While we have been very happy with Israel Dagg's performances at 15, Ben has come in and raised the bar to another level. The challenge for Israel now is to get his performances - when he gets the opportunity - to an even higher level."
Elsewhere the team is as expected with Aaron Cruden to start at first-five and Beauden Barrett likely to make an appearance off the bench. Jerome Kaino continues at blindside but there is no place for Liam Messam.
Israel Dagg's rise and fall
*Becomes a rock for the All Blacks throughout 2012 and plays solidly in 2013 even though his Super Rugby form was poor.
*Struggles again with the Crusaders who drop him from starting XV.
*Missed last two tests against England because of injury and plays more convincingly for Crusaders after June.
Starting XV
1. Wyatt Crockett (27 tests)
2. Dane Coles (18)
3. Owen Franks (57)
4. Brodie Retallick (27)
5. Samuel Whitelock (54)
6. Jerome Kaino (51)
7. Richie McCaw (c) (127)
8. Kieran Read (62)
9. Aaron Smith (29)
10. Aaron Cruden (32)
11. Julian Savea (22)
12. Ma'a Nonu (91)
13. Conrad Smith (77)
14. Cory Jane (48)
15. Ben Smith (29)
Reserves:
16. Keven Mealamu (113)
17. Ben Franks (31)
18. Joe Moody (0)
19. Steven Luatua (11)
20. Sam Cane (14)
21. TJ Perenara (3)
22. Beauden Barrett (19)
23. Malakai Fekitoa (2)
