The midfielder was carried off in the Foxes' 2-0 win over Southampton last week and scans have confirmed the severity of the issue.
He may now not return until 2016, after appearing to catch his studs in the turf, and is set for an operation on Tuesday.
Boss Nigel Pearson said: "He's awaiting an operation which he'll undergo next Tuesday
It's not great news for him but hopefully it'll be a straightforward operation
It'll be based on whatever needs to be done.
"It's a real shame for him because he has done ever so well for us
He missed the end of last season as well so it's always disappointing for individuals.
"The most important thing for him is to get the corrective surgery and, from there, get his rehab right.
"These are never nice injuries to deal with but he is a very popular member of the squad and we wish him a speedy recovery."
James has played 29 games for Leicester this season and made 99 appearances, scoring five goals, for the club since joining from Manchester United in 2012.
Source : PA
Source: PA