An ankle injury has prevented Bryant from playing in the Los Angeles Lakers' past three games. Iverson has missed Philadelphia's last five games because one of his young children is ill.
Both informed the league on Thursday that they needed to withdraw from Sunday's game, sources said.
NBA commissioner David Stern, who makes all selections on All-Star injury replacements, then chose Kidd to make his 10th All-Star appearance. Kidd -- who ranks fifth in the league in assists (9.3 per game) -- had already left Dallas to begin an All-Star break vacation in the Phoenix area and is expected to fly back to Dallas on Friday.
Mavericks owner Mark Cuban said it took a little lobbying to league officials to name Kidd as Bryant's replacement.
"But once we laid it out, they were really excited about it," Cuban told reporters in Dallas.
Although he is still scheduled to travel to Dallas and take part in All-Star Weekend festivities as a spectator, Bryant is the third West guard to pull out of Sunday's game through injury. Stern chose Denver's Chauncey Billups to replace New Orleans' Chris Paul (knee) and Los Angeles Clippers center Chris Kaman to take the spot of Portland's Brandon Roy (hamstring).
Golden State's Monta Ellis, sixth in the league in scoring at 26.2 points per game, might have been a contender to replace Bryant but suffered a knee strain in Tuesday's home loss to Dallas that forced him to miss Wednesday's win over the Clippers.
Iverson has averaged 14.4 points in 25 games since returning to the Sixers in December and earned more than 1 million votes in fan balloting to earn an East starting spot. Iverson will not be required to travel to Dallas because he's missing the game for personal reasons.
Lee is averaging 20 points and 11.4 rebounds and becomes the Knicks' first All-Star since Allan Houston and Latrell Sprewell in 2001. Stern chose Lee over Milwaukee center Andrew Bogut, who is averaging 16.0 points and 10.2 rebounds and has helped lead the Bucks to within a game of a playoff spot in the East.
West coach George Karl and East coach Stan Van Gundy will choose the players who will replace Bryant and Iverson in the respective starting lineups.
It's expected that Mavericks forward Dirk Nowitzki, who just missed out on a starting spot in fan voting when San Antonio's Tim Duncan passed him in the final ballot tally, will replace Bryant as a starter with the West.
ESPNDallas.com's Tim MacMahon contributed to this report.