Wallace, 38, a 6-foot-11 power forward, had averaged 7 points and 4 rebounds per game with the Knicks playing limited minutes.
He returned to the NBA this season to make a comeback with the Knicks after sitting out two years with injuries and re-injured his foot in Monday night's loss against the Charlotte Bobcats, the New York Daily News said.
He had surgery for a stress fracture in February and pulled himself out of the Bobcats game after playing less than 4 minutes.
"Rasheed has given this team everything he had," said Coach Mike Woodson in a statement. "He is a winner, true professional and leader on and off the court. Due to his injury, he will not be available to play for us during the playoffs."
Wallace, an All-Star in 2006 and 2007, was drafted by the Washington Bullets in 1995 and played for the Portland Trail Blazers, Atlanta Hawks and won an NBA championship with Detroit Pistons. He played with the Boston Celtics in 2010 before his first retirement.