Despite being criticised in some parts for lacking intensity, Craig told Melbourne radio station 3AW that Watts was rested with hamstring soreness and had not been dropped.
He will be replaced by Brad Green who has been recalled to the side to face the Power on Friday night.
Craig has also defended Melbourne's tough new training regime under coach Mark Neeld.
"Some players will think it's absolutely fantastic (and) some will struggle big time," said Craig.
"I often used to say when I was the coach of the Adelaide Football Club, 'I don’t make any apologies for creating a club that's not for everyone.' And that's certainly the path that the Melbourne Football Club is going down."
Sam Blease has also been recalled to the Demons side after playing in the VFL last weekend, whilst Rohan Bell, Daniel Nicholson, Troy Davis and Jack Fitzpatrick have all been dropped back to Casey.
Melbourne has also ruled out mature-aged rookie James Magner with a hand injury.
Melbourne's squad to play Port Adelaide
2. Nathan Jones
3. Clint Bartram
6. Matthew Bate
7. Jamie Bennell
8. James Frawley
9. Jack Trengove
11. Mitch Clark
12. Colin Sylvia
13. Jordie McKenzie
14. Lynden Dunn
15. Ricky Petterd
17. Sam Blease
18. Brad Green
20. Colin Garland
22. Brent Moloney
25. Tom McDonald
27. Jared Rivers
28. Joel MacDonald
30. James Sellar
34. Stefan Martin
36. Aaron Davey
38. Jeremy Howe
40. Mark Jamar
46. Josh Tynan
47. Tom Couch
