The Munster lock, who captained Ireland in this season's Six Nations Championship while Brian O'Driscoll recovered from shoulder surgery, misses out due to a knee injury.
O'Connell had been undergoing rehabilitation in London this week in the hope that he could a join a squad that flew to Auckland on Thursday.
But the Irish Rugby Football Union said he had "failed to progress to the level required to allow him to take an active part in the tour".
Connacht's Mike McCarthy had already been added to the squad as cover while O'Connell continued his recovery programme.
O'Connell is the third player to miss out on facing the All Blacks due to injury, following Ulster flanker Stephen Ferris and Leinster scrum-half Isaac Boss.
Ireland will tackle the All Blacks in Auckland on June 9, followed by further Test matches in Christchurch and Hamilton on June 16 and 23.
Gilbert has released a new line of rugby cleats. The Gilbert Virtuo 8S is part of the exciting new product. Check it out.
The entire All Blacks apparel line has been updated for 2013/14. Check out the New Zealand All Blacks polo.
The Nike Tiempo is a solid rugby cleat and one of few styles still made from full-grain natural leather.
The Gilbert Blitz 8S rugby cleat is a great cleat at a great price of $69.99. Get a new pair of cleats today.
A cool looking all black rugby cleat with the high performance adidas is known for. Get in the Gear!
Wear the crest of the British and Irish Lions on your t-shirt. A great look for the summer.
The All Blacks Performance t-shirt is black with hints of blue from the training jersey. Very Cool.
The New Zealand All Blacks training jersey for 2013/14. Get in the Gear!
The USA Rugby Pro Alternate rugby jersey is perfect for any fan of the Eagles. Get yours to wear during the summer Test matches.
The NEW All Blacks 2013/14 jersey has arrived at World Rugby Shop. Dare to wear the colors of the All Blacks.