The Wallabies fly-half had an MRI scan on his return home from Australia's Tri-Nations trip to South Africa, and he now requires a full shoulder reconstruction.
Estimates are that Larkham will be sidelined for six months, ruling him out of remaining Tri-Nations appointments with New Zealand (twice) and South Africa, plus the British and Irish tour.
Australia are due to face England at Twickenham on November 12, followed by Ireland in Dublin seven days later and Wales in Cardiff on November 26.
Elton Flatley and Matt Giteau are leading contenders to replace Larkham against the All Blacks in Sydney on Saturday week.
"The shoulder itself didn't feel that bad on Saturday, but the MRI indicates it is, and the advice is to have the reconstruction now," said Larkham.
"It is a tough decision, but the right thing to do to give me the best opportunity in time to recover for next year.
"It's disappointing on a number of fronts, missing out on the rest of the Test season, the upcoming Bledisloe Cup match against the All Blacks and the opportunity to improve on our start to the Tri-Nations."
Wallabies coach Eddie Jones added: "Steve is a resilient character, but this is extremely disappointing for him, especially after he has been in such good form this season.
"While he could keep playing with the injury, we feel it is in his best interests to have it treated fully now and give him plenty of time to recover for next season."