Australian Test captain, said it was an honour to be appointed. Clarke stood down after he failed to recover from chronic back pain. Wicketkeeper Matthew Wade will be Watson's deputy.
"It's really a dream come true to be asked to captain your country. I've captained some one-day internationals (ODI), but to be asked to captain a Test will be the ultimate honour.
"It's obviously very disappointing that Michael hasn't come up, his batting and leadership will certainly be sorely missed, but I'm looking forward to the challenge and responsibility over the next five days," Watson said in a statement.
For Watson, captaincy comes after a week of high drama that saw him leave India in a hurry after he was dropped for the third Test, along with three others, for breaching discipline in Mohali.
Watson, who was Clarke's deputy, was even contemplating retirement as he returned home to be with his wife Lee for the birth of their first child, Will. He was also upset with Cricket Australia (CA) high performance manager Pat Howard, who said that Watson was only "sometimes" a team player.
But later Watson and Howard called a truce and the all-rounder decided to return to join the team for the Delhi Test.
The 31-year-old Watson admitted it has been a roller coaster ride for him in the last two weeks.
"It has been a very up and down week emotionally. To be stood down from a Test match hit me very hard and it's been a great process over the week to get back into the team and contribute again.
"Michael and Mickey talked to me about it when I first arrived back in India so I knew it was always going to be touch and go with Michael to be at good fitness and able to play," admits Watson. I mentally started preparing from there knowing I could have the opportunity," said Watson.
Cricket Australia (CA) national selection panel member Rod Marsh said the decision to appoint Watson as the captain was straight-forward.
"Michael gave himself every opportunity to play, has worked hard to be fit and done everything the medical staff have asked of him but has not come up. The decision for Shane Watson to step in as captain was a very straight-forward one for the NSP. Shane is the vice captain on this tour and as a senior member of the group is well credentialed to lead Australia in Michael's absence," he said.
Team physiotherapist Alex Kountouris said Clarke would undergo scans after he returns to Sydney.
"The plan is for Michael to return to Sydney as soon as possible to have a series of scans and we will monitor his progress over the coming days before deciding on the best course of action. We will be taking the opportunity to investigate and manage his ongoing hamstring injury that has been intermittently troubling him since the Australian summer," he said.