Wallace was left in agony on the side of the pitch after being crunched in a tackle by England and Leicester centre Manu Tuilagi.
At 35 the British and Irish Lion will not get another shot at a World Cup and coach Declan Kidney admitted it was heartbreaking for player and country alike.
"We don't know the exact prognosis yet, but it was a bad bang on the knee and unfortunately it will definitely rule him out of the World Cup," said Ireland's coach, Declan Kidney.
"He took it like the man he is. These things happen unfortunately and you have to deal with them.
"He's 35 now but I've never seen a man as physically fit as he is right now, never. It's heartbreak for him and his family and extremely disappointing for us. It'll be good news for someone else which is the cut-throat nature of sport.
"We obviously have contingency plans, that's why we brought 44 into training."
If, as feared, Wallace has suffered serious ligament damage it will also keep him out of a large chunk of Munster's RaboDirect Pro12 campaign, which begins against the Dragons on Saturday.
Wallace's injury has resulted in Leinster's Shane Jennings being called into the squad while team-mate Cian Healy will fly out four days later than planned to give time for an eye injury sustained in the defeat to England time to recover.
But coach Kidney insists his side are still well equipped to compete with the best in New Zealand.
"All of the lads have had around two games and they needed those two games," added Kidney
"If you go to the World Cup you want to compete at the highest level.
"We wanted to challenge ourselves against England and France to know exactly where we are, and we know now.
"We've lost four in the series, which is extremely disappointing. That's not what we aimed for.
"No excuses to camouflage results, we're here to get results. We'll keep working and will get better."
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