The 31-year-old has been ruled out of the entire Super 14 season and he will undergo a knee reconstruction in the next few weeks.
Latham, who is currently the second highest try scorer in Wallaby history with 31 international tries, has made 72 appearances for Australia and played in the 1999 and 2003 World Cup campaigns.
He faced the British and Irish Lions with Queensland Reds and the Wallabies during the Lions' 2001 tour.
Despite the injury, Latham has scoffed at reports he will miss the World Cup, insisting he will return in the best shape of his career.
"Like everything in my career, I've thankfully found a positive side to it all and I know come April or May, I'm going to be in the best shape that I've ever been."
Despite being unlikely to play in the Super 14 season, Latham is convinced he will recover in time to play in his third World Cup in France this summer.
"I'm very confident that I'll be back April or May," he reiterated. "I'll be back, definitely.
"If it was ever going to happen this year, I'm happy it's happened now and not a month or two down the track when, realistically, it would have been far too late."
Latham confirmed that while he has ruptured the anterior cruciate ligament and damaged the medial ligament, the cartilage has not been affected.
"I've been lucky that there's no other damage. Everything else within my knee is very clean and I've got no other niggly stuff that should hold me back at all."
He is scheduled to visit a specialist on Wednesday.