The UFC says Cruz has a torn anterior cruciate ligament.
"It's true Cruz blew his ACL. Stay tuned for more info," UFC president Dana White tweeted.
The July 7 fight in Las Vegas was to have been the third between the two rivals, with each holding a win.
"Im bummed people, Thanx 4 the support as i battle this,big sorry to all the fans out there! I WILL recover n I WILL b back 2put on a show!" tweeted Cruz.
Said Faber: "It sucks for everybody. ... I'm ready to scrap July 7."
The two 135-pounders are currently serving as coaches on "The Ultimate Fighter Live."
The UFC 148 main event pits middeweight champion against Chael Sonnen.