Silva, 22, was excluded after suffering a thigh injury in his last game for Monaco, while full back Fabio Coentrao and forward Danny were also ruled out through injury.
Santos decided not to risk Atletico Madrid midfielder Tiago, who has just recovered after being sidelined for five months with a broken leg.
Silva's absence opened the way for Sanches, who only made his professional debut in October and was sold from Benfica to Bayern Munich for 35 million euros ($40 million) earlier this month.
As expected, 37-year-old central defender Ricardo Carvalho, who fell out with Santos' predecessor Paulo Bento, was included in the squad.
“It was difficult to leave out some players who were fundamental in the qualifying competition but decisions have to be taken so that we are finely-tuned in France, with everyone in peak condition,” Santos told reporters. “It's a short and intense tournament.
“All the players were picked after a great amount of thinking,” said the former Greece coach. “The physical state of the players was one of the criteria and Bernando Silva has some restrictions.”
Santos also downplayed any concerns that Cristiano Ronaldo's appearance in the Champions League final later this month could impact his performance in France.
Ronaldo, who will lead Real Madrid against Atletico Madrid in the final on May 28, was struggling with injury two years ago when he played in the final of Europe's top club competition.
With little time to rest before the start of the 2014 World Cup, the three-times world player of the year was well below his best in Brazil and Portugal were knocked out in the group stage.
But Santos assured supporters that there would be no repeat.
“Cristiano Ronaldo will be on his best form and I am convinced that he is physically prepared to play the Champions League and the European championship,” he said. “He is very ambitious in relation to this competition.”
Santos added: “Portugal are not favourites, we don't pretend to be so. But we are good enough to face any opponent on equal terms.”
Goalkeepers: Anthony Lopes (Olympique Lyon), Eduardo (Dínamo Zagreb), Rui Patricio (Sporting)
Defenders: Bruno Alves (Fenerbahçe), Cedric (Southampton), Jose Fonte (Southampton), Eliseu (Benfica), Pepe (Real Madrid), Raphael Guerreiro (Lorient), Ricardo Carvalho (Monaco), Vieirinha (VfL Wolfsburg)
Midfielders: Adrien Silva (Sporting), Joao Mario (Sporting), William Carvalho (Sporting), Andre Gomes (Valencia), Danilo Pereira (Porto), Renato Sanches (Benfica), Joao Moutinho (Monaco)
Forwards: Cristiano Ronaldo (Real Madrid), Eder (Lille), Nani (Fenerbahce), Rafa (Braga), Ricardo Quaresma (Besiktas)
Original source: Silva out as Portugal name Euro squad