No decision has been made on whether O'Connell will leave or stay with the squad.
Ospreys second row Ian Evans will start against the Rebels in place of Parling, while recent call up Tom Court also features. The Irish prop is drafted onto the bench for Mako Vunipola, who is being rested as cover for the second Test due to Alex Corbisiero's calf injury. Tom Croft comes on to the bench to replace Evans.
"I want to push on now and put my hand up for the Test," said Lydiate, who featured briefly as a replacement in the 23-21 win over the Wallabies in Brisbane.
"It is massive because we lost to the Brumbies in the last midweek game," he added, looking ahead to the Rebels game.
"We have to keep the momentum going now.
"All of the boys want to impress to try to get in the squad for the weekend. There is a lot on this game, especially for us players."
Lydiate leads a strong looking side to face the Rebels with fellow Welshmen Richard Hibbard, Evans and Toby Faletau all starting. Owen Farrell partners Connor Murray at half back while head coach Warren Gatland is boosted by the return of centre Manu Tuilagi. Tommy Bowe is also on his way back from his hand problem.
"To have Tommy and Manu fit and back is a great compliment to the medical staff," said Gatland.
"Tommy is fit for Saturday, he's running, but the more time he has to heal, the better.
"The surgeon said that that injury is normally a six to eight-week injury, so to be fit in three weeks is magnificent. It's important not to risk him on Tuesday.
"We don't think Jamie (Roberts) is too far away, he's up and running and is potentially available for next weekend."
Meanwhile, Australia captain Australia captain James Horwill has been cleared to play in the second Test against the Lions after a charge of stamping was not upheld.
Horwill was cited after his boot came into contact with Alun Wyn Jones' head at a ruck but judicial officer Nigel Hampton QC decided he could not be certain of an intentional act of stamping.
"After hearing all the evidence I could not find that when James Horwill's right foot came into glancing contact with Alun Wyn Jones' face, he was acting recklessly," Hampton said.
"In an endeavour to regain his balance, Horwill brought his right leg to the ground unknowing that Alun Wyn Jones' head was in that area, due to having his sight impeded by the presence of Michael Hooper and Tom Croft, who were beneath him and over the top of Alun Wyn Jones.
"Due to these reasons I cannot uphold the citing."
British & Irish Lions: (v RaboDirect Melbourne Rebels, June 25)
15 Rob Kearney (Leinster/Ireland) 14 Sean Maitland (Glasgow Warriors/Scotland)13 ManuTuilagi (Leicester Tigers/England) 12 Brad Barritt (Saracens/England) 11 Simon Zebo (Munster/Ireland) 10 Owen Farrell (Saracens/England) 9 Conor Murray (Munster/Ireland); 1 Ryan Grant (Glasgow Warriors/Scotland) 2 Richard Hibbard (Ospreys/Wales) 3 Dan Cole (Leicester Tigers/England) 4 Richie Gray (Scotland)) 5 Ian Evans (Ospreys/Wales) 6 Dan Lydiate (Dragons/Wales, capt)7 Sean O'Brien (Leinster/Ireland) 8. Toby Faletau (Dragons/Wales)
Replacements: Rory Best (Ulster/Ireland), Tom Court (Ulster/Ireland), Matt Stevens (Saracens/England), Tom Croft (Leicester Tigers/England), Justin Tipuric (Ospreys/Wales), Ben Youngs (Leicester Tigers/England), Billy Twelvetrees (Gloucester Rugby/England), Stuart Hogg (Glasgow Warriors/Scotland).