What makes the physical world different in this context? Isn't it things that humans are currently doing that we're automating away? Why not a human-like (in terms of capabilities) machine so it has similar flexibility?

Atoms are harder to reorganize than bits, undo is not an option because of entropy, game over means you are dead.

Yes, and my point is that human like is so difficult that solving lesser problems is a much more tractable approach.