Spurs coach Gregg Popovich made the announcement during Saturday's pregame shootaround at the team's facility, saying he made the decision to hold Leonard out.
"In the end, I guess it's my decision," Popovich said. "He's not thrilled that he's not playing, but he's not ready."
Popovich said second-year man Jonathon Simmons will start in Leonard's place.
Shooting guard Danny Green expressed surprise regarding the news.
"No Kawhi?," Green asked. "There's still hope. I'm still gonna hope until tipoff that maybe he'll show up in a cape."
When Leonard originally suffered the ankle injury in Game 5 of the Western Conference semifinals against the Houston Rockets, a source explained the club will always prioritize a player's long-term health over single games, a franchise practice which dates all the way back to the early Tim Duncan years.
Duncan tore the lateral meniscus in his left knee on April 11, 2000 in Game No. 78 of the regular season, and the injury forced him out of the final four games. As the Spurs prepared for the playoffs, Duncan tried to convince the brass he could play, but Popovich shut down the power forward for the playoffs, and the Spurs lost that series 3-1 to the Phoenix Suns.
The source said the Duncan situation started Popovich's philosophy of the team always working to "do what's best for the player" when dealing with injuries, even if it means sacrificing potential victories in the playoffs.
Popovich confirmed that assertion Saturday when asked if Leonard's long-term health came into play when he made the final call.
"Sure, that's a part of the decision-making process," Popovich said.
Green explained that San Antonio's approach to prioritizing a player's long-term health sets it apart from other organizations around the league.
"Not many [organizations do that], not many," Green said. "You'll see guys go out there with broken bones, missing fingers, just to get them through it or get them into the game because they don't want to mess up the rhythm, the flow, the chemistry and give their team a chance. Here, they've done it in the past with Timmy and [Tony] Parker. If guys are hurt, long term, the bigger picture is what matters here. They care about guys' bodies and careers."
Leonard reinjured the ankle Sunday during the second half of San Antonio's Game 1 loss to the Warriors. Popovich mentioned after Game 1 that he anticipated Leonard's recovery to take longer than when he originally suffered the injury in Game 5 of the Western Conference semifinals.
The Warriors lead the Western Conference finals 2-0.
Leonard attended Friday's workout but didn't participate. He didn't appear to be walking with a limp.
Since Leonard departed Game 1 with 7:54 left in the third quarter, the Warriors have outscored the Spurs 194-133. In Leonard's absence, the team has shot 37 percent from the field, including 8-of-30 from 3-point range, while the Warriors are connecting on 57 percent of their shots, including 24-of-54 from deep.
"We had a bad outing in Game 2," Popovich said. "It was embarrassing. That's not who we are. So we'll see how we come out tonight."
The club is also without veteran point guard Parker, who ruptured a quadriceps tendon against the Rockets in the conference semifinals.
"With no Kawhi, it's gonna be tough," Green said. "But regardless of who's on the floor, we've got to play basketball."