The 71-times capped former national captain replaces Cardiff Blues' Gareth Cooper, who has been handed the chance to face the touring Wallabies wearing his regional colours this evening (Tuesday).
Scarlets scrum half Martin Roberts takes up Peel's position on the bench in the only other change to the match day 22 which downed the Pumas.
Ryan Jones becomes only the fifth player, in 127 captains, to lead his country for the 20th time and elsewhere Jonathan Thomas is poised to make his 50th international appearance should he be utilised from the bench.
Head coach Warren Gatland's message is clear as he says 'same again' to the forward pack which saw off the Pumas and retains the bulk of the creative backline which crossed for three tries last time out as he attempts to retain the James Bevan Trophy.
"We were pretty pleased with the performance against Argentina, we matched them up front, our defence held up well and we are starting to show a more clinical edge in attack," said Gatland.
"Dwayne comes into the side in a straight swap for Gareth, allowing two Welsh scrum halves a shot at the Wallabies in the space of a week and ensuring both players have the chance to benefit from the experience.
"That decision is primarily about putting the interests of the player and of Welsh regional rugby first, but elsewhere we are looking for the same again from the bulk of the side who beat the 2007 World Cup semi-finalists.
"There is still improvement left in us and we feel we need to go up a couple more gears if we are to achieve what we want against Australia, but we are coming to the end of the Series and the players feel they are starting to get into their stride.
"The level of performance is improving throughout the squad as we spend more and more time together and we hope to get a little nearer the peak of our powers at the weekend."
Wales' record against Australia shows two wins, a draw and three losses in the last six meetings and although Gatland is no slave to the history books he does concede his side enjoy playing the Wallabies.
"They will be gunning for us but this Wales squad hasn't feared Australia, has had some success in recent history and enjoys playing them in what are always tough encounters," said Gatland.
"The Wallabies were incredibly unlucky last weekend and they won't want a repeat of that losing experience in Cardiff. They may be coming to the end of a long and gruelling tour, but they won't allow themselves to have one eye on that plane back to the Australian summer, until they have thrown everything at us and emptied the tank at the Millennium Stadium.
"They are one of the top three teams in world rugby and we have no right to expect anything other than the sternest of tests - both physically and mentally - on Saturday, but we feel we are up to it."
WALES: James Hook; Leigh Halfpenny, Jamie Roberts, Jonathan Davies, Shane Williams; Stephen Jones, Dwayne Peel; Gethin Jenkins, Matthew Rees, Paul James, Alun-Wyn Jones, Luke Charteris, Andy Powell, Martyn Williams, Ryan Jones (Captain)
Replacements: Huw Bennett, Duncan Jones, Jonathan Thomas, Dan Lydiate, Martin Roberts, Andrew Bishop, Tom James
15 James HOOK (OSPREYS - Cap No 1,047)
DoB: 27.06.85. 6'0" / 1.83m. 14st 12lbs / 94kgs
International record: 36 caps (W 16, L 19, D 1; 209 pts - 6T, 34C, 35PG, 2DG)
14 Leigh HALFPENNY (CARDIFF BLUES - Cap No 1,060)
DoB: 22.12.88. 5'10" / 1.77m. 13st 1lb / 83kgs
International record: 9 caps (W 5, L 4; 40 pts - 5T, 5PG)
13 Jamie ROBERTS (CARDIFF BLUES - Cap No 1,057)
DoB: 08.11.86. 6'4" / 1.93m. 16st 10lbs / 107kgs
International record: 15 caps (W 8, L 7; 5 pts - 1T)
12 Jonathan DAVIES (SCARLETS - Cap No 1,066)
DoB: 05.04.88. 6'1" / 1.86m. 16st 3lbs / 103kgs
International record: 4 caps (W 4; 10 pts - 2T)
11 Shane WILLIAMS (OSPREYS - Cap No 976)
DoB: 26.02.77. 5'7" / 1.71m. 12st 13lbs / 82kgs
International record: 67 caps (W 33, L 32, D 2; 240 pts - 48T)
10 Stephen JONES (SCARLETS - Cap No 966)
DoB: 08.12.77. 6'1" / 1.86m. 14st 12lbs / 94kgs
International record: 82 caps (W37, L43, D2; 722 pts - 7T, 120C, 144PG, 5DG)
9 Dwayne PEEL (SALE SHARKS - Cap No 994)
DoB: 31.08.81. 5'9" / 1.76m. 13st 8lbs / 86kgs
International record: 71 caps (W 34, L 35, D 2; 25 pts - 5T)
1 Gethin JENKINS (CARDIFF BLUES - Cap No 1,006)
DoB: 17.11.80. 6'2" / 1.88m. 18st 13lbs / 120kgs
International record: 71 caps (W 31, L 38, D 2; 15 pts - 3T)
2 Matthew REES (SCARLETS - Cap No 1,033)
DoB: 09.12.80. 6'0" / 1.83m. 17st 1lbs / 108kgs
International record: 33 caps (W 16, L 16, D 1; 10 pts - 2T)
3 Paul JAMES (OSPREYS - Cap No 1,021)
DoB: 13.05.82. 6'1" / 1.86m. 17st 7lbs / 111kgs
International record: 4 caps (W 3, L 1)
4 Alun-Wyn JONES (OSPREYS - Cap No 1,046)
DoB: 19.09.85. 6'5" / 1.96m. 19st 1lbs / 121kgs
International record: 34 caps (W 15, L 19; 20 pts - 4T)
5 Luke CHARTERIS (NEWPORT GWENT DRAGONS - Cap No 1,030)
DoB: 09.03.83. 6'9" / 2.06m. 19st 9lbs / 125kgs
International record: 17 caps (W 10, L 7)
6 Andy POWELL (CARDIFF BLUES - Cap No 1,061)
DoB: 23.08.81. 6'4" / 1.94m. 17st 6lbs / 111kgs
International record: 11 caps (W 7, L 4)
7 Martyn WILLIAMS (CARDIFF BLUES - Cap No 944)
DoB: 01.09.75. 6'0" / 1.83m. 15st 11lbs / 100kgs
International record: 90 caps (W 42, L 45, D 3; 73 pts - 14T, 1DG)
8 Ryan JONES (OSPREYS, CAPTAIN - Cap No 1,029)
DoB: 13.03.81. 6'5" / 1.96m. 18st 0lbs / 114kgs
International record: 36 caps (W 21, L 14, D 1; 5 pts - 1T)
16 Huw BENNETT (OSPREYS - Cap No 1,017)
DoB: 11.06.83. 6'0" / 1.83m. 17st 0lbs / 108kgs
International record: 26 caps (W 16, L 10)
17 Duncan JONES (OSPREYS - Cap No 997)
DoB: 18.09.78. 6'0" / 1.83m. 17st 8lbs / 112kgs
International record: 56 caps (W 26, L 28, D 2)
18 Jonathan THOMAS (OSPREYS - Cap No 1,013)
DoB: 27.12.82. 6'5" / 1.96m. 17st 5lbs / 110kgs
International record: 49 caps (W 25, L 22, D 2; 35 pts - 7T)
19 Dan LYDIATE (NEWPORT GWENT DRAGONS - Cap No 1,071)
DoB: 18.12.87. 1.93m / 6'4". 15st 13lbs / 101kgs
International record: 1 cap (W 1)
20 Martin ROBERTS (SCARLETS - Cap No 1,062)
DoB: 06.06.86. 5'9" / 1.76m. 12st 1lb / 77kgs
International record: 2 caps (W 1, L 1)
21 Andrew BISHOP (OSPREYS - Cap No 1,059)
DoB: 07.08.85. 6'0" / 1.83m. 15st 0lbs / 95kgs
International record: 7 caps (W 6, L 1)
22 Tom JAMES (CARDIFF BLUES - Cap No 1,055)
DoB: 17.04.87. 6'2" / 1.88m. 15st 1lb / 96kgs
International record: 7 caps (W 4, L 3; 10 pts - 2T)