O'Connell was ruled out of contention on Tuesday after failing to recover from the shoulder injury he sustained in the 43-31 defeat by France.
Ireland boss Eddie O'Sullivan has promoted O'Callaghan, a British & Irish Lions tourist, from the bench - with his Munster team-mate Mick O'Driscoll filling the vacancy among the substitutes on Sunday.
Ulster back Andrew Trimble has been preferred on the left wing to Tommy Bowe, who drops out of the squad altogether - while Marcus Horan is restored at prop.
In total O'Sullivan has made three changes to the starting line-up which faced France. Leinster's Girvan Dempsey takes Trimble's place on the bench.
Jerry Flannery has been named at hooker despite struggling with an ankle injury, with Shane Byrne ready to come into the squad in case the Munster man fails a fitness test.
Bowe has endured an indifferent Six Nations to date, but O'Sullivan declared his omission from the line-up for Wales was not the end of his Test career.
"Andrew getting in was just a selection issue. Trimble came off the bench in Paris and did well," he said.
"It's a tough call on Tommy - who hasn't done too badly - but Andrew is looking better in that position.
"I think Tommy is disappointed with himself. He's not playing to the best of his ability - but he's still young."
Ireland, beaten 32-20 at the Millennium Stadium last season as Wales completed their Grand Slam, are gunning for the second victory of this year's tournament - with Italy their only victims to date.
Ireland team to face Wales at Lansdowne Road on Sunday February 26:
G Murphy (Leicester); S Horgan (Leinster), B O'Driscoll (Leinster, captain), G D'Arcy (Leinster), A Trimble (Ulster); R O'Gara (Munster), P Stringer (Munster); M Horan (Munster), J Flannery (Munster), J Hayes (Munster), D O'Callaghan (Munster), M O'Kelly (Leinster), S Easterby (Llanelli), D Wallace (Munster), D Leamy (Munster).
Replacements: R Best (Ulster), S Best (Ulster), M O'Driscoll (Munster), J O'Connor (Wasps), E Reddan (Wasps), D Humphreys (Ulster), G Dempsey (Leinster).