The Cheetahs star, who began all three Tests against the Lions two summers ago, has failed to recover from an Achilles problem.
A World Cup winner last time out, Smith has been one of his country's most consistent performers in recent seasons.
But the 29-year-old won't be adding to his 69 international caps at what would have been his third World Cup after he admitted defeat in his attempts to recover from the partial tear he suffered playing Super Rugby back in February.
"I must stop lying to myself - what I've been doing these last three weeks - and realise that I'm not ready," said Smith.
"I am not 100%. I won't be able to give everything and realise I should put my team, team-mates and the Bok fans first.
"The pain-level that I have been practicing with, was seven out of ten, which means I had to endure a lot.
"I really cannot describe how disappointed I am...immensely."
South Africa still have plenty of back-row options, however, with Heinrich Brussow having recently recovered from injury; Schalk Burger on his way back to fitness; Ashley Johnson having made a decent start to his international career and Danie Rossouw, Jean Deysel, Willem Alberts, Pierre Spies and Ryan Kankowski all in good form.
The Boks take on the All Blacks in their final Tri Nations fixture of the year in Port Elizabeth on Saturday. Head coach Peter de Villiers has named Alberts, Brussow and Spies as his starting back row, with Rossouw and Johnson among the replacements.
Morne Steyn starts at outside-half after Butch James wore the No10 shirt against Australia, while Patrick Lambie takes over from the injured Frans Steyn at full back and skipper John Smit can only manage a place on the bench.
"This is our last chance to look at certain combinations before the Rugby World Cup. We've had these changes in mind since we started our planning for the international season, depending on the injury situation," said de Villiers.
"It's important to give the players valuable game time and allow them to work in the team in a cohesive way. We will take 30 players to the Rugby World Cup and you have to give all those 30 guys the hope they can play in the final."
South Africa (vs New Zealand, Saturday)
Pat Lambie; JP Pietersen' Jaque Fourie , Jean de Villiers, Bryan Habana; Morné Steyn, Fourie du Preez; Gurthrö Steenkamp, Bismarck du Plessis, Jannie du Plessis, Bakkies Botha, Victor Matfield (captain), Heinrich Brüssow, Willem Alberts, Pierre Spies
Replacements: John Smit, Tendai Mtawarira, CJ van der Linde, Danie Rossouw, Ashley Johnson, Francois Hougaard, Butch James