Townsend joined Newcastle from Tottenham in January and has impressed for the Magpies despite their relegation to the Championship, scoring four goals in 10 appearances.
And with Walcott struggling for playing time at Arsenal, Hodgson plumped for the 24-year-old Londoner in his 26-man provisional squad.
The 68-year-old said: "They are both good players, they are different players.
"They play in wide positions but they are not similar players.
England (@England) May 16, 2016
"Andros was unlucky to lose his place in the squad when he wasn't getting a regular game [at Tottenham]. Since he's gone to Newcastle he's got a regular game and has done well.
"Theo, unfortunately, has not got a regular game and has had a few problems with injuries.
"It's a tough decision but one you have to make."
Walcott's lack of fitness may, ultimately, have counted against him with Hodgson already gambling on Arsenal team-mate Jack Wilshere and Liverpool captain Jordan Henderson, both of whom are coming back from injury.
The former Inter Milan boss added: "The most important thing is, I don't want to name people, including in the preparation squad, who were unfit and would have to be looked after by our medical staff and we would have to sweat on their fitness.
"I want players who are actually fit, if they haven't played enough games it does not matter.
"You always have players who you want to have had a few more games before the tournament starts, but also you want some players to have played less. I was happy to see Jordan [Henderson] back and these three matches [warm-up games against Turkey, Australia and Portugal] can help with fitness.
"Jack has been back for the last two matches and longer than that if you take into account the under-21 games."