Australia's delegation leader Nick Green announced the selection on the eve of Friday's ceremony, saying the three-time Olympic silver medallist in women's basketball was the "perfect choice."
"Jackson is an inspiration to all our team," Green said in a statement. "There is no one better to lead our team as we attempt to mix it with the superpowers of sport here in London."
Jackson has won a silver medal in the last three Olympics as Australia's Opals finished second to the United States in 2000, 2004 and 2008.
She considers it a gap in her glittering CV.
Jackson has been voted Most Valuable Player in the WNBA three times, has won two WNBA titles and has also won a world championship with Australia.
The 31-year-old Jackson opted not to play for the Seattle Storm for the first three months of the WNBA season so she could concentrate on trying to win gold with the Opals, and was surprised to be considered for the honour of carrying the flag.
Other leading contenders included beach volleyball veteran Natalie Cook, who will be competing in her fifth Olympics, and triple gold medallist swimmer Leisel Jones, who is also competing at her fourth Olympics.
"Why me? There are other candidates better than me," Jackson was quoted as saying.
Green had little doubt about Jackson's credentials.
"To me, Lauren is an unassuming athlete with wonderful leadership qualities on and off the court," Green said. "She has all the qualities I admire in a leader and that is the person our team needs as a captain here in London. She is admired by her teammates and respected by her opponents.
"I have watched her play for many years. She has a never say die attitude, a trait that I admire very much."
Jackson made her debut on the national team at 17 and made her Olympic debut at Sydney 2000.