The 22-year-old Saracens outside-half will see out the remainder of the tour before returning Aviva Premiership club for further assessment and treatment in conjunction with the England medical team.
“The knee has been scanned and there is a strain there,” said England head coach Stuart Lancaster.
“It’s disappointing for Owen as he was desperate to play in the final Test but such is his character that he is already working on his rehab and still contributing to the tour.”
Farrell strained the medial ligament in his left knee during last weekend’s 28-27 defeat in Dunedin, giving Leicester Tigers’ Freddie Burns another chance to start for the Red Rose on the tour after he stood in for Farrell in the opening Test defeat in Auckland.
“Fortunately we have three other fly-halves to call on and we’ll make that selection call over the next few days,” Lancaster added.
“The squad trained well this morning and we will narrow down selection over the next 24 hours following the game this evening.”
Sale Sharks outside-half Danny Cipriani started for England in a match against Super Rugby club Crusaders on Tuesday morning with Northampton’s Stephen Myler on the bench and both are in contention to make the bench for the final Test.
England centres Luther Burrell and Billy Twelvetrees trained on Tuesday as they bid to overcome ankle injuries to make the final Test, but Harlequins scrum-half Danny Care is set to miss out with a shoulder problem.
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