Walcott ruled out for four weeks
Walcott, who only recently returned from a back problem, injured his medial ligament when he was sent crashing to the turf by a robust tackle from Birmingham City defender Liam Ridgewell.
"The news is not good," manager Arsene Wenger told the club's website. "We are without Theo Walcott for longer than expected.
"We thought it would be just 48 hours but it is a medial knee ligament, which is what I feared after the game. He will be out for three to four weeks."
Arsenal will also be without Czech midfielder Tomas Rosicky for the Champions League trip to AZ Alkmaar on Tuesday although his knee injury is less serious.
The Gunners top Group H with two wins out of two.