The Chelsea midfielder has been struggling to shake off the problem after undergoing surgery in recent weeks.
He was rested for a match against Colombia and trained with his international team-mates on Friday - however, he confirmed on Saturday he has withdrawn from the tournament in South Africa, which starts next Friday.
Mikel explained: "It is the same knee and I did not want to risk any further damage, also I think it is in the best interest of the team for me to withdraw rather than waste a slot."
The player had been closely monitored since joining his team-mates at their pre-tournament training camp on the outskirts of London a week ago, with coach Lars Lagerback repeatedly giving reassurances over his fitness.
On Friday, Mikel trained fully with the rest of the squad for the first time since they arrived at their World Cup base in Durban.
Saturday's news is a massive blow for the Super Eagles, although Mikel himself is backing them to excel when they begin their quest to qualify from Group B against Argentina on Saturday.
He added on Kick Off: "I wish the team good luck and I know that they will surprise people."
Lagerback has acted immediately to replace Mikel, adding uncapped Sochaux midfielder Brown Ideye to his squad.
The 21-year-old was one of the unlucky seven players to be dropped from the squad earlier this week when the Swede trimmed his list to 23.
Ideye is yet to play for the Super Eagles at senior international level, but has impressed during his time with the Under-20s, helping them to reach the quarter-final of the 2007 World Cup in Canada.
The Nigerians wrap up their preparations for the finals with a friendly against North Korea in Johannesburg on Sunday.
After their opening Group B match in Johannesburg, Lagerback's team face Greece in Bloemfontein on June 17 before wrapping up their group matches with a match against South Korea in Durban five days later.