The defender was stretchered off during Arsenal’s 2-2 draw at Manchester United on Wednesday night.
It was feared Holding would be sidelined for the foreseeable future with the injury.
And Arsenal have now confirmed Holding has ruptured the anterior cruciate ligament in his left knee.
They say the 23-year-old will undergo surgery in the coming days.
Holding is expected to return to action within six to nine months.
The Arsenal star has been a revelation under Unai Emery this season.
Holding has started nine Premier League games this time out, impressing in a back three.
Speaking after Arsenal’s 2-2 draw at United this week, Emery hailed his side while admitting the Gunners probably deserved all three points.
He said: “I think we controlled the game, the second half better than the first.
“We could have won this match in certain moments, but they equalised very quickly after both our goals.
“We need to improve defensively.
“But we need to have balance and not lose our attacking chances.
“We perhaps lost a bit of control there but we created lots of chances after 2-2 and I am very proud of our performance.
“We wanted to win but we can feel this point is good.”
Arsenal are back in action on Saturday afternoon against Huddersfield in the Premier League.