The Gunners confirmed on their official website that Walcott is likely to be out for at least six months as a result of the problem sustained in the 2-0 FA Cup third-round win over Tottenham at the weekend.
Walcott was taken from the field on a stretcher - and was subsequently pelted with objects thrown from the away end - after appearing to jar his knee when making a tackle during the closing stages of the encounter although the injury has turned out to be more severe.
The 24-year-old did not appear to be in severe pain as he was carried off the field at the Emirates Stadium on Saturday and even signalled "2-0" in the direction of 5,000-strong Tottenham fans, as missiles, including coins and plastic bottles, were seen to hit medical staff as they carried the stretcher around to the tunnel on the halfway line.
Walcott learned on Monday that he would face no disciplinary action for his hand gesture, but the latest news is much more devastating.
"After coming off injured in Saturday's 2-0 win against Tottenham Hotspur, the club regrettably announces that Theo Walcott has sustained a ruptured anterior cruciate ligament of his left knee," said the statement on the club's official website.
"Theo will have surgery in London in the near future and is expected to be out for at least six months, therefore missing the remainder of the season and the World Cup in Brazil in the summer."
Walcott, aged 17, was an unused member of England's squad for the 2006 World Cup finals in Germany and was surprisingly left out of the squad for the 2010 tournament in South Africa.
The loss of Walcott - who has scored five goals since returning from a stomach muscle injury - has further depleted Wenger's attacking options, given Nicklas Bendtner is expected to miss all of January with his ankle problem picked up when scoring a late goal in the 2-0 win over Cardiff on New Year's Day.
Wenger will now almost certainly have to bolster his squad with some firepower - even if maintains a big-money signing during January is notoriously difficult to push through.
Wenger last week played down a move for Dimitar Berbatov, but the veteran Fulham forward would appear to fit the bill in terms of price-tag and experience.