Llanelli's Lee Byrne slips down to the bench allowing Thomas, who started in midfield against the Springboks, to switch back to his preferred role.
Ceri Sweeney was a contender to slot in at outside-centre after making a try-scoring appearance off the bench last week.
But Ruddock and assistant coach Scott Johnson believe he is more effective as a replacement and opted for Watkins, who has impressed during Wales' tough autumn campaign.
"The rationale for selection was to minimise the changes this week and build on the performance against South Africa,' said Ruddock.
"We decided to sacrifice the left booted kicking option offered by Lee (Byrne) in favour of playing Alfie in his preferred position and giving Matthew Watkins his chance at centre.
"We felt we needed as much experience as possible in the back line and have opted for Matthew and Sonny Parker as the centre pairing.
"We wanted to get a good look at Matthew from the start of a high level international ahead of the coming Six Nations defence.
"The other option was to bring in Ceri Sweeney but the thinking there is that Ceri has been able to make such a positive impact from the bench that we want to try to keep that weapon in our armoury."
Ruddock is still missing six of his British & Irish Lions, while Dafydd Jones, Hal Luscombe and Luke Charteris are also sidelined.
Wales opened their autumn series with a 41-3 defeat to New Zealand before stumbling to an 11-10 win over Fiji - but there were signs against South Africa that Ruddock's injury-hit side are returning to something like their old selves.
Wales side to play Australia at the Millennium Stadium on Saturday: G Thomas (Toulouse, capt); D James (Llanelli Scarlets), M Watkins (Llanelli Scarlets), S Parker (Ospreys), S Williams (Ospreys); S Jones (Clermont Auvergen), G Cooper (Newport Gwent Dragons); D Jones (Ospreys), R Thomas (Cardiff), C Horsman (Worcester), I Gough (Newport Gwent Dragons), R Sidoli (Cardiff), C Charvis (Newcastle), M Williams (Cardiff), M Owen (Newport Gwent Dragons).
Replacements: M Davies (Gloucester), A Jones (Ospreys), I Evans (Ospreys), J Thomas (Ospreys), M Phillips (Cardiff), C Sweeney (Cardiff), L Byrne (Llanelli Scarlets).