The Rockets announced the decision Friday, a day after the injury was found in an MRI exam. Team physician Walter Lowe said surgery is the usual treatment for such an injury, which has sidelined Yao since Nov. 10.
The 30-year-old Yao is still consulting with doctors to determine how he will proceed. If he chooses surgery, it could be up to 10 months before he can return to the court.
The seven-time All-Star sat out last season after reconstructive surgery to repair his broken left foot. Lowe said this injury is related to last year's injury. He said the reconstructive surgery on his foot does not put him at a greater risk of stress fractures, but that Yao has always been prone to them.
Yao's reconstructive surgery was to make the foot flatter and help distribute the stresses.
"When you look at the course of Yao's career, stress fractures have been part of his foot," Lowe said. "So to say he's not at a risk to continue to have stress fractures would be crazy. So he is at a continued risk. The new position of his foot should ... make those stresses lower."
Rockets general manager Daryl Morey said he is hopeful that Yao will recover and play for the team in the future, despite the latest setback.
"We need to continue to talk to the doctors and see where that goes," Morey said. "Yao Ming's an All-Star center and when you look throughout the league there's not very many of them. So if it looks like there's a good prognosis here -- and we're still learning how good that prognosis will be -- for sure we're going to look at Yao Ming past this season."
Lowe is also optimistic that Yao can play again.
"Is this something that I would say: 'Hey, you've got no chance of ever playing again'? No, absolutely not," Lowe said.
Yao was not made available to the media on Friday, but Morey said he's taking the news hard.
"How much he's been off the court, and how much he cares about his teammates and the fans and the Rockets, probably is really tough for him," Morey said.
Houston coach Rick Adelman said the news is difficult because they were so excited about his return.
"It's just really sad, and you have to really feel for him because he's worked so hard to come back and then to have this happen," Adelman said. "Last week, he was talking about getting out to play pretty soon, and now to get the news, you really feel for him and feel for our team."
Yao is due to make $17.7 million this season after signing a five-year contract extension in September 2005. Morey said the Rockets will explore options including possible trade and signing exceptions and cap relief to soften the blow of Yao's absence.
"We're examining those," Morey said. "We haven't finalized the course of action or talked to the league about that. Those can help if you get them. Those are things you generally apply for and then the league chooses to grant. A lot of the circumstances around this injury gives us a good chance at those options."
The Rockets went 42-40 and missed the playoffs with Yao on the sideline last season, and are just 10-15 so far this year, at the bottom of the Southwest Division.
Morey said the team has prepared for this possibility and that the Rockets are resilient and will get past this setback.
"We still feel like we're a team that can make the playoffs this season," Morey said. "We feel like we're fighting with about four or five other teams for maybe the seven, eight seed this season. I know our guys in the locker room aren't writing the season off. I know I'm not. I know coach [Rick] Adelman isn't. We still think this can be a great season."
Los Angeles Laker Ron Artest, who played a season in Houston with Yao, wished his former teammate well.
"I hope his career's not over," Artest said. "I love Yao. He's a good player. I hope he gets healthy, maybe take a year or two off, and just get healthy and come back and play."
Yao was the top overall draft pick in 2002 and first began to have injury problems in the 2005-06 season. His left foot has been the main problem. He first broke a bone in the foot with four games left in the 2005-06 season.
He broke his right leg in the 2006-07 season, forcing him to sit out 32 games, before a stress fracture in his left foot in February 2008 forced him to miss the playoffs. He had pins inserted and rushed his rehabilitation to play for China in the Beijing Olympics.
Yao played 77 regular-season games in 2008-09 and had no problems with his foot until the second round of the playoffs, when he injured it again. That injury proved to be the most serious, when the hairline fracture didn't heal and he was forced to undergo complex surgery.
When he returned this season after sitting out for more than a year, the Rockets closely monitored his playing time and limited his work to no more than 24 minutes a game.
But in the fifth game, Yao was injured again. The initial diagnosis was a mild ankle sprain that would keep him out about a week. Nine days after the injury, the team called it an ankle bone bruise and said Yao was expected to sit out two more weeks.
Yao has been one of the NBA's most valuable and recognized ambassadors.
Thanks in large part to Yao's impact, the NBA launched NBA China in January 2008. A year ago, NBA games and programming were available on 51 television and digital media outlets in China and NBA merchandise was being sold in about 30,000 retail locations there.
Yao has averaged 19.1 points and 9.3 rebounds in seven seasons.