The 21-year-old missed Wednesday morning's training session after suffering the problem on Tuesday and left team's training camp in Coverciano to undergo further tests in a nearby hospital.
Italy's team doctor Enrico Castellacci later revealed that Balotelli's injury had ruled him out of both Friday's game in Serbia and Tuesday's clash with Northern Ireland.
"Balotelli had problems during practice yesterday," Castellacci told a press conference on Wednesday afternoon.
"We have decided, having spoken to Manchester City, to send him home."
Balotelli's injury is a further setback for the Italians, who are already without Inter Milan forward Giampaolo Pazzini (foot) and are sweating on the fitness of Villarreal frontman Giuseppe Rossi (knee).
Regarding the condition of Pazzini and Rossi, Castellacci added: "Pazzini was better and little by little he will recover. However, he will continue his recovery in Milan.
"As for Rossi, he has already began therapy on his knee and was better this morning.
"He will pass a late fitness test this afternoon and could be available for the trip to Belgrade."
AC Milan's Antonio Cassano and Parma's Sebastian Giovinco are currently Italy's only fit strikers for Friday's game in Belgrade, and coach Cesare Prandelli may call up a replacement.
Italy have already secured their place at Euro 2012 and remain unbeaten in qualifying.