The inspirational loose forward suffered a quadriceps strain against Tonga but hasn't recovered in time. Sam Burgess will skipper the side, a role he performed during the 2016 Four Nations, with Ben Currie starting and Jonny Lomax moving to the bench.
England assistant coach Denis Betts says O'Loughlin did everything he could overcome his injury.
"We'd given him every chance, and he's given himself every chance," Betts said.
"He's worked really hard with our medical team and pushed himself as hard as he possibly could.
The final call probably came down to 'Lockers' as well. He knows his body. It's probably not the easiest thing to do, but made a real brave call (as) World Cup finals don't come around very often."
The injury means Burgess gets a chance to lead England in the biggest game of his career. He's won a premiership with South Sydney, played in Four Nations finals and Tests with Great Britain, but tomorrow night's clash with Australia will be up there with those.
"It's fantastic and is a job I don't take lightly," Burgess said.
"I love being in this position [as captain]. I don't think it gets much better than a World Cup final. It's bittersweet if I'm honest – Sean's been the captain the whole tournament.
"He's been a huge part of our success in this campaign. You saw it six months ago in the mid-season Test. He's a fantastic player in the team."
O'Loughlin's injury follows a tournament-ending knee injury to star England and Canberra Raiders hooker Josh Hodgson, who has been replaced by James Roby.
"We'll lose two senior boys – great players – but we gain James Roby who gets a chance to start the game," Burgess said.
"As much as we'll miss the boys, those coming in are excited about the opportunity."
Asked whether the injury weakens England's chance of winning their first World Cup since 1972, Burgess disagreed.
"Not really much, not at all really," he said.
"Not much changes for us. We've been extremely consistent with our training. For us, it's really important we turn up and do our job. Thinking about winning is something we don't need to do; we simply need to execute our plays."
Betts said Burgess wouldn't change the way he plays despite the new role.
"He brings what Sam brings," Betts said.
"I know you expect to say he'd bring something else when you give him the captain's armband but Sam's Sam, whether he's a captain or a player. When he was 18 years of age, it was probably the same."