O'Connor, who vowed just a month ago to change his ways in a bid to keep his Wallaby jersey, ended up in trouble trying to board a plane to Bali with his girlfriend hours after Australia beat Argentina in the Rugby Championship on Saturday.
Police said a 23-year-old man, widely identified in the media as O'Connor, had been removed from Perth airport.
Wallabies coach Ewen McKenzie said the player had failed "to demonstrate and uphold the behavioural and cultural standards expected within the team" and would not travel on their two-week tour to South Africa and Argentina.
"We won't be forced into making any decisions around his return until I'm satisfied that he can once again contribute positively to what we are trying to achieve as a group," McKenzie said in a statement.
"The reality is that representing your country is the ultimate honour but also a week-to-week proposition. To be selected, players must consistently do the right things on and off the field.
"We'll continue to assess James on that basis before any team decisions are made about a return."
The Australian Rugby Union is investigating the incident and said that once complete, a decision on possible further action would be taken.
Wallabies captain James Horwill said he was bitterly disappointed at O'Connor.
"We're embarking on a pretty critical moment of Australian rugby, you know, a two-week tour of South Africa and Argentina and it is a big, big moment for this team," he told Fox Sports' Rugby HQ programme.
"And I guess the fact that we're sitting down talking about an off-field incident, no matter who it is, is disappointing."
Like McKenzie, he said he expected more from someone representing their country.
"The team has got strong values that we want to uphold as being Wallabies and being representatives of your country," he said.
O'Connor has a history of disciplinary issues, including being spotted at a burger bar at 04:00 three days before the must-win second Test against the British and Irish Lions in June. He also missed the team bus for the Third Test.
In 2011 he was suspended after sleeping through the World Cup team announcement.
Former great Nathan Sharpe, who was O'Connor's first captain at Western Force and played alongside him in the Wallabies, said players had been disappointed by his behaviour for "a long time".
"I don't know what went on in this incident, and whether there was alcohol involved or there wasn't, but there has just been too many (incidents)," Sharpe told The Sydney Daily Telegraph.
Asked if team-mates were upset with O'Connor, Sharpe said: "Yeah, they are. They all are. I don't know if it will be said publicly but I know having been alongside most of those guys, they were disappointed a long time ago."
The Wallabies, third in the four-nation southern hemisphere Rugby Championship, are due to fly out of Australia in the coming days for the tour of South Africa and Argentina.
Waratahs wing Peter Betham will replace O'Connor in the Wallabies' 28-man squad.