The decision was made Sunday night, Phillips said, after watching film of Saturday's second fall scrimmage. He told Smith and Newton on Monday morning.
"Max Smith, we feel, gives us the best chance to win at this point," Phillips said. "He'll be our starting quarterback versus Louisville."
Smith played in seven games as a true freshman last fall, starting three. He finished the year with 819 passing yards, four passing touchdowns and four interceptions while completing 54.9 percent of his passes.
He entered camp as the favorite to win the job over Newton, who had surgery on his right (throwing) shoulder for a torn labrum after the 2011 season ended.
It wasn't an easy decision, Phillips said. But Smith's accuracy in camp and his ability to move the offense set him apart. He also started with the upper hand after taking all of the snaps during spring practice.
"You've got to be savvy," Smith said. "Got to complete passes. All types of passes, take what the defense gives me. Be able to read the defense better than I did last year. Have to get my team going and be a leader out there. That's what I need to be."
Newton, a highly-touted recruit who helped the Wildcats to three wins on the road in the Southeastern Conference in 2009, never found his groove last year.
He completed 47.7 percent of his passes while throwing for 793 yards, eight touchdowns and seven interceptions in eight starts. He said he still wasn't fully recovered from his shoulder surgery that sidelined him in spring.
"There have been days when it was tough," Newton said. "Tough to control the ball, stuff like that with soreness. That's part of dealing with the territory. I just have to keep battling and put myself in position to take a lot of reps."
Offensive coordinator Randy Sanders had previously said Newton was struggling to return to form after going several months without being cleared to throw.
No decision has been made between Towles and Whitlow for the No. 3 spot on the depth chart. Phillips previously said he'd like one of the freshman quarterbacks to play at some point this season.
The focus now turns to the season opener. The Wildcats will have one final day to install the offense and defense on Tuesday, then a day off when the fall semester begins on Wednesday. Thursday will be the first day of preparing to face Louisville on Sept. 2.
"(Smith) needs to focus on playing quarterback," Sanders said. "Don't worry about anything else, just do his job. If he does his job well, it makes everybody else's job on the field easier. Just get ready to play. Not that he needs to be looking over his shoulder but at the same time, I told Morgan I don't expect him to quit competing at this point either. I expect him to keep competing and those two young guys to keep getting better.