The former England captain's tour was ended 21 minutes into the game at Rotorua, when he slipped into a tackle and was caught awkwardly under a pile of bodies that included captain Brian O'Driscoll and is set to be sidelined for up to six months.
The loss of the back-row forward, who also suffered injury heartbreak in Australia four years, represents a setback to the Lions' hopes of a Test series victory over New Zealand.
Dallaglio may be 33 next birthday but he came on tour playing as well as ever and was expected to be the inspirational driving force behind the Lions' bid for Test glory.
Instead, he is in an Auckland hospital not only having to deal with his badly damaged ankle but also begin the painful process of re-focusing his goals.
Playing for the Lions had been Dallaglio's over-riding focus in the 12 months since he stood down from the England team.
"I am obviously very, very disappointed that my Lions tour should end in the first match with an injury that puts me out of the whole trip," he said.
"But I've been around long enough to know that injuries are part of the game and no matter how difficult it is you have to be philosophical. I now just have to prepare myself mentally for the long process of recovery.
"For me, the tour is over, but for the other players they have a great challenge ahead of them and they know they have my full support."
Dallaglio will have to remain in New Zealand for up to a fortnight before he is a position to fly home.
He is replaced in the squad Ireland blind-side flanker Simon Easterby, who was at Shannon airport en route to Japan on Ireland's summer tour when the call came through.