Bayern Munich have confirmed that the Spain international will undergo surgery and will consequently miss this summer's tournament as well as the DFB Pokal final
The 23-year-old recently resumed regular training action after a brief spell on the sidelines due to another knee problem and was expected to make his comeback in this weekend's DFB Pokal final against Borussia Dortmund.
However, reports emerged on Wednesday that Thiago had suffered another setback and Bayern have now confirmed that the former Barcelona man has ruptured a ligament, ruling him out of the finals in Brazil.
"This is a bitter blow for Thiago and we feel really sorry for him," Bayern CEO Karl-Heinz Rummenigge stated.
"He's a young guy who has been working hard to be fit for the World Cup in the country where he was born and now all of a sudden that dream is over.
"We will look after him in the next few weeks and do everything within our power to make sure he is ready for the start of the new season."
Thiago was set to make his first appearance at a major tournament at this summer's World Cup after he was included in the 30-man provisional squad that Del Bosque announced earlier this week.
He was ruled out of both Euro 2012 and the 2012 Olympics due to injury, though he did play a starring role in the European Under-21 championship last year, where he scored a hat-trick in the final win over Italy.