James was injured in the win over Southampton on Saturday and scans have since revealed he suffered a ruptured anterior cruciate ligament.
The 23-year-old, who joined the Foxes from Manchester United in 2012, will miss between six and nine months according to boss Nigel Pearson. He is one appearance away from reaching his century for the club.
“It’s disappointing for Matty, who has been among our most consistent performers in the last three seasons and is an enormously popular member of the squad. We all wish him a speedy recovery,” Pearson said.
“Recovering from long-term injury is as much of a mental challenge as it is a physical one and, if the positive attitude Matty has shown this week is anything to go by, we can expect him to come back as strong as ever.
“He has a fantastic work ethic and is a strong character, which will be important for him in the coming months.”