The Italian Football Federation made the announcement Sunday following medical tests on Balotelli's left quadriceps.
The injury occurred during Italy's 4-2 loss to Brazil on Saturday.
The federation said that Balotelli would continue to be monitored in the hope that he can return for Italy's next match - either the final or the third-place game.
Italy faces Spain on Thursday then the final and third-place games are scheduled for June 30.
Balotelli has been the Azzurri's most explosive player in the tournament so far. He scored the winner in Italy's 2-1 victory over Mexico, converted a penalty in the 4-3 win over Japan and set up a goal for Emanuele Giaccherini in the loss to Brazil.
Also, Balotelli has started as Italy's lone true forward in each match thus far. Alberto Gilardino would seem to be the logical replacement if Italy coach Cesare Prandelli sticks with the single-striker lineup. Or he could use several forwards such as Stephan El Shaarawy, Sebastian Giovinco, Alessio Cerci or Alessandro Diamanti.
A few other Italy players are also injured.
Key playmaker Andrea Pirlo was expected back for the semifinals after missing the Brazil game with a muscle problem although he only performed a brief, light running session Sunday before being accompanied off the practice pitch by team trainers.
Also, midfielder Riccardo Montolivo underwent a cerebral scan after a knock to the head against Brazil although the tests were negative. Still, he will be evaluated over the next few days.
Meanwhile, fullback Ignazio Abate was sent home after dislocating his right shoulder.
Spain routed Italy 4-0 in their last meeting, last year's European Championship final.
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