Prior, 32, stood down from England duty in the aftermath of the second Test defeat at Lord's because of injury.
Buttler, 23, will make his Test debut having played 33 one-day matches and 36 Twenty20 games for his country.
Spinner Simon Kerrigan has been dropped from the squad for the third Test, which starts on Sunday, 27 July at Hampshire's Rose Bowl.
Lancashire wicketkeeper Buttler was called up as cover for the first Test at Trent Bridge, but Prior recovered from a thigh injury to play.
He averages 32.73 in one-day internationals, including a superb 121 from 74 balls in a defeat by Sri Lanka in May.
National selector James Whitaker said: "Jos Buttler comes into the squad following some very exciting limited-overs performances for England and a good record with Lancashire this season.
"Matt Prior has contributed a huge amount to the England side over the years and should be proud of his record throughout his 79 Tests.
"He has decided to take time out of the game to work on his fitness and we will continue to follow his progress over the coming months. "
There is no replacement for Kerrigan, with the selectors announcing a 13-man squad.
India lead the five-Test series 1-0 after their victory at Lord's followed a draw at Trent Bridge.
England squad: Alastair Cook (Essex, capt), Moeen Ali (Worcestershire), James Anderson (Lancashire), Gary Ballance (Yorkshire), Ian Bell (Warwickshire), Stuart Broad (Nottinghamshire), Jos Buttler (Lancashire), Chris Jordan (Sussex), Liam Plunkett (Yorkshire), Sam Robson (Middlesex), Joe Root (Yorkshire), Ben Stokes (Durham), Chris Woakes (Warwickshire).
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