A medical scan on Wednesday confirmed the seriousness of his injury, the English Football Association said in a statement.
Owen, 26, is expected to return home to England immediately where he will begin treatment with his club, Newcastle United.
Owen's shock injury occured in the first minute of Tuesday's match in Cologne as he collapsed clutching his knee and was seen crawling off the pitch.
Slow-motion TV footage showed what appeared to be an agonising twist in Owen's knee as he fell to the ground after playing a pass to team-mate Ashley Cole.
If, as some suspect, Owen has suffered a ligament injury, he could be out of play for up to six months.
"As soon as it happened I knew I was in trouble"
Owen himself has described the injury and his departure from the tournament as "a massive blow."
"As soon as it happened I knew I was in trouble. It was a major disappointment to pick up the injury so early in the game," he said in comments released on Wednesday.
First Match: England v Chile, Feb 11, 1998
"I'm clearly sorry to be leaving the lads in Germany, but I'm convinced they can go on and achieve success.
"I'll be following all the matches very closely and giving them my full support, hopefully all the way to Berlin.
England Captain David Beckham, a former Real Madrid teammate of Owen's, said the squad was devastated by his injury and vowed to win the World Cup for him.
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"That's what we said at half time when we came in and we knew it was a bad injury," he said.
"It's sad - Michael's one of those players you need in big tournaments. It's unfortunate for him and for us."
Owen had not yet fully recovered from a broken foot sustained on New Year's Eve and had been criticised for a below-par performance in games against Paraguay and Trinidad and Tobago.
He was substituted in both matches without scoring.
Some had called for Owen to be dropped from the team, but Sven-Goran Eriksson, the England coach, kept him in the squad.
End of the tournament for Owen
Owen is England's third all-time top scorer with 36 goals is 80 games.
His departure leaves Eriksson just three strikers to call on for Sunday's second round match against Ecuador - a still-recovering Wayne Rooney, Peter Crouch and untested teenager Theo Walcott, who has not even played a game in the English Premiership.
Speaking after Tuesday's match, Paul Robinson, the England goalkeeper, said the team was "devastated" by Owen's injury.
"We think it is quite a serious one," he said.
"Michael won't be playing any more part in the World Cup. I'm disappointed for him and the team as well. It's a very unfortunate incident."