Ponting has averaged 3.6 across five innings in the current one-day series.
His dumping makes way for the return of vice-captain Shane Watson, who has been recovering from a calf injury and making his way back to the national side via the Sheffield Shield.
As expected Michael Clarke also returns to the team after recovering from a hamstring strain.
“Ricky Ponting has been dropped from the squad due to his lack of form in the five matches to date in this series,” chairman of selectors John Inverarity said in a statement.
“The team will not seem the same without him, but moving on from the omission of players who have been outstanding over a long period of time is the nature of elite sport.
“Ricky’s record speaks for itself. He is one of the truly great performers in the history of Australian ODI cricket, with his reputation enhanced further by him captaining Australia to two World Cup victories.
“Ricky’s contribution goes far beyond his batting statistics and his brilliant fielding.
“The example he sets in every respect and his extraordinarily positive influence in the dressing-room is acknowledged by all. He is held in the highest possible regard by his team-mates and there is no higher accolade than this.
“Shane Watson also comes back into the squad. He is an all-rounder of proven class and the NSP is keen to have him re-join the squad.”
Selectors also showed their continued support for Victorian gloveman Matthew Wade after similarly out-of-form Brad Haddin failed to perform for New South Wales against Western Australia at the weekend.
Haddin made a pair of ducks as the Blues fell by an innings and 323 runs at the WACA ground.
“The NSP made the decision that Matthew Wade is now the preferred ODI wicket-keeper for the Australian ODI team,” the statement said.
Selectors also tweaked Australia’s pace attack ahead of Friday’s clash with Sri Lanka at Bellerive Oval.
“Ryan Harris has been re-included in the squad with Mitchell Starc making way for his return,” Inverarity said.
“Mitchell will benefit greatly from the Tests and the ODIs he has played. His development as a player of the future is most encouraging.”
Australian squad: Michael Clarke (c), Shane Watson (vc), Dan Christian, Xavier Doherty, Peter Forrest, Ryan Harris, Ben Hilfenhaus, David Hussey, Michael Hussey, Brett Lee, Clint McKay, Matthew Wade, David Warner. (ABC.Net)