Villas-Boas was in the early days of his short reign at Chelsea when his skipper Terry clashed with Queens Park Rangers defender Anton Ferdinand last October.
The incident at Loftus Road eventually led to Fabio Capello stepping down as England coach, Terry losing the captaincy of his country and then quitting the national team last Sunday.
News of Terry's FA punishment, a four-match ban, filtered through as Villas-Boas spoke to reporters at the Spurs training ground.
NEWS:Terry banned for four games by FA
"It's a massive loss for England," Villas-Boas said as he prepared for his team's Premier League game at Manchester United on Saturday. "John Terry is a player of unbelievable talent and he has helped his country so much and is also a stalwart for Chelsea.
"It's difficult for a player like him to take a decision like this. But from the perspective of the England squad... it leaves manager Roy Hodgson in a difficult position.
"I'm not taking anything away from the other England centre-backs but John Terry is a player of great talent," added Villas-Boas.
Asked to comment on the FA's decision to find Terry guilty of racial abuse, Villas-Boas said: "I understand the frustrations of both parties involved.
"I supported the player at the time and I continue to back the player 100 percent. I think it was a sad and difficult situation.
"I understand Anton Ferdinand's frustration too and the episode that we are facing," added Villas-Boas.
"As managers and media we have a task, we all know we must protect the game in a situation like this and to promote good values. But this has been so strange, so different, through various legal situations, that I've lost the understanding of it."
