The 33-year-old suffered the knock in Ulster's PRO12 defeat to Glasgow Warriors on Friday, with the injury more serious than first suspected.
"Ulster Centre, Paddy Wallace, sustained an injury to his left knee in Friday night's RaboDirect PRO12 match against Glasgow at Scotstoun," read a statement on the club's official website.
"Following a scan yesterday evening, it was confirmed that he has suffered a ruptured anterior cruciate ligament. This injury will require surgery and a significant period of rehabilitation."
Wallace will therefore miss the Heineken Cup quarter-final clash against Saracens on April 6.