The American qualified for eight events at the U.S. Trials, the same number he swam at Athens in 2004 and Beijing in 2008, but ditched the freestyle to focus on the relays.
"I looked at all of the events and it really just came down to the programme," Phelp's coach Bob Bowman told reporters.
"It came down to the 400 IM (individual medley) or the 200 free had to go. I think he'd be good in the in either one but it just made sense to drop the 200 free."
Phelps triumphed in the 200m freestyle in the Beijing Games when he won an unprecedented eight gold medals but was beaten in the four-lap race at the last two world championships.
The 27-year-old won the 200 at the Olympic trials but in a relatively slow time of one minute of 45.70, well outside the world record currently held by Germany's Paul Biedermann.
"What he did here was quite good but we realised that the level he did here will not be acceptable to win gold medals in London in most of the events," Bowman said.
"This allows him to focus all of his energy to the 4x100 relay on the second night of the meet without having to do two 200m frees the night before."
By dropping the 200m free, Phelps will now swim seven events; the 100 and 200 butterfly, the 200 and 400 individual medleys and three relays, and has good chances in all of them and adding to his Olympic stockpile.
He already holds the record for the most gold medals at a single Olympics (eight) and overall (14) and needs just three more medals of any colour in London to surpass the overall mark of 18 held by former Soviet gymnast Larisa Latynina.
Phelps has struggled for motivation after his amazing performance in Beijing and only got back into serious training 18 months ago.
He had hinted that he would swim a reduced programme in London, which will be his fourth and final Olympic appearance, but it was only after he finished all his events at the trials that the decision to drop the 200m was made.
"As Michael said all along, it wasn't going to be eight. He's said that for the last four years," Bowman said.
"It makes sense. No-one should be expected to do that twice. Once was enough."
His withdrawal from the 200 freestyle forced a reshuffle in the U.S. team and left Ryan Lochte as the favourite to win gold.
Ricky Berens, who finished third in the trials to make the relay team, will replace Phelps in the individual race.
Davis Tarwater, who finished seventh, was added to the relay squad, although Phelps remains an automatic choice for all three relays.
Lochte beat Phelps in the 200 freestyle final at last year's world championships in Shanghai and finished a close second to his rival at the U.S. trials when he was also swimming a gruelling programme.
U.S. head coach Gregg Troy, who is also Lochte's regular coach, said it made sense for Phelps to drop an event.
"That's a tough programme Michael swims, it's really tough," Troy said.
"He's a little bit older, and those older guys don't recover quite as quickly, and it's hard to do."