The defender picked up the injury in Scotland’s dramatic Euro 2012 qualifying win over Liechtenstein on Tuesday night, and manager Jim Jefferies is devastated by the news.
"Lee has torn his cruciate ligament, the posterior, and we are looking at six months out of action," he told Hearts' official website.
"It appears his season is all but over and that is a hammer blow, first and foremost for the lad as everything seemed to be falling into place for him. His form had taken him into the international team, he had taken over the captain's armband with Marius [Zaliukas] out and he had been doing really well.
"It's also a major blow for the club and the team and it goes without saying everyone at the football club wishes him well with his recovery."
With a difficult home fixture against Celtic on Saturday, Jefferies will now have to try and fill the gap left by Wallace’s absence, although he is trying to remain as positive as possible about the situation.
"These are the things that football can throw at you and we'll just have to deal with it. We have had to play guys out of position before and we'll just have to try to fill the void as best we can," he added.