Handscomb is already in England with the Australia A team that is touring the country concurrently and is set to join up with the World Cup squad on Friday.
Marsh was ruled out of the World Cup with a fractured forearm after being struck by a ball from Pat Cummins while batting in the nets at Old Trafford, two days before Australia's final round-robin match against South Africa.
Australia Coach Justin Langer said "We have made the decision to call up Peter Handscomb to replace Shaun in our World Cup Squad of 15. Pete is a like-for-like player, in terms of batting in the middle order, and he performed very well for us during our recent tours in India and the UAE."
Handscomb narrowly missed out on a spot in Australia's original World Cup squad, showing impressive form in the lead-up to the tournament but having to make way for the returns of Steven Smith and David Warner from their ball-tampering bans.
Since the turn of the year, the wicketkeeper-batsman has scored 479 ODI runs at an average of 43.54 and a strike rate of 98.15, with three fifties and a match-winning century in a chase of 359 against India.
Hopefully Pete, who plundered over 1000 runs for Tring as our overseas player in 2011 will get his chance to play against South Africa and push his case of making the team for the World Cup Semi-Final next week.