The Belgian international had been expected to return to Real's squad after an ACL tear in his left knee last August. He underwent an MRI scan later on Tuesday that confirmed the damage to his right knee.
"Following tests carried out today, our player Thibaut Courtois has been diagnosed with a ruptured internal meniscus in his right knee," the club said in a statement.
Courtois is now unlikely to play for Madrid in the rest of the current campaign, while he had already ruled out featuring for Belgium at the European Championships in the summer.
Ukrainian Andriy Lunin has won coach Carlo Ancelotti's trust as Madrid's goalkeeper in recent months, ahead of Kepa Arrizabalaga, on loan from Chelsea.
Ancelotti said on Friday that he was optimistic about soon being able to count on both Courtois and Brazil defender Eder Militao, who also suffered a torn ACL in August.
Ancelotti had said the plan was for them to play two friendlies against Real's youth team during the international break before returning to the first team for the final stretch of the season.
"They (Courtois and Militao) have started to work with the group, completing normal training sessions," Ancelotti told a press conference on Friday.
"I think they will be able to make it (to the first leg against City). In fact, the idea is that they will be available on March 31st, for the LaLiga match against Athletic Bilbao, but we won't risk anything, that's more than clear."
LaLiga leaders Madrid face Champions League winners Manchester City in the quarter-finals of this season's competition.
