The team said an MRI showed no other signs of ligament or meniscus damage, adding Gallinari will have season-ending surgery soon and "a prognosis for a full recovery is excellent."
"We're extremely disappointed for Gallo. He was having a career year in scoring and rebounding and was a huge reason for our success," said Masai Ujiri, Nuggets executive vice president of basketball operations. "We will obviously support him and be there for him throughout his recovery.
"Knowing his work ethic and commitment to getting back on the floor, we are confident he will come back stronger than ever next season."
Gallinari planted his left leg awkwardly while going for a layup in the first half of Denver's 95-94 win Thursday night, its 19th straight at home. His knee buckled and he went down, screaming in pain.
The Nuggets sent him for an MRI on Friday and it confirmed their fears of a serious injury that will require a long rehabilitation.
The 24-year-old Italian forward averaged 16.2 points, 5.2 rebounds and 2.5 assists in 71 games this season for Denver, which has clinched a playoff berth.
Acquired from the New York Knicks in the blockbuster trade of Carmelo Anthony two years ago, Gallinari signed a four-year, $42 million extension last season.
Gallinari is the Nuggets' second-leading scorer, and their top scorer, Ty Lawson (16.7) is out indefinitely with a torn right heel.
The Nuggets were off Friday following games on back-to-back nights, one in Salt Lake City. But Gallinari's coach and teammates were steeling themselves for the bad news after the game.
"I can't deny it didn't look good," coach George Karl said. "I usually look at the player's face and he was scared."
The Nuggets' deep roster will be tested now over the stretch run and in the playoffs.
"You never want to see anybody go down but especially a guy like Gallo that's so important to us," said Corey Brewer, who replaced Gallinari and finished with a game-high 23 points. Brewer made three big plays in the final minute to move the Nuggets within one win of tying their franchise-best 20-game home winning streak set in 1984-85.
"It's going to be tough on us," Brewer said, "but we've got to just keep playing hard."
Gallinari's left knee buckled inward as he drove past Dirk Nowitzki and Darren Collison to the basket for a layup. He gave up the ball, grabbed his left knee and hopped out of bounds, where he sat down, screaming in pain as Collison scored at the other end for Dallas.
The Nuggets, who haven't lost at home since Jan. 18 against Washington, are third in the Western Conference in their quest for home-court advantage in the first round of the NBA playoffs, a task that will be harder without Gallinari.