The All-Star will have arthroscopic surgery Wednesday on torn cartilage in his left knee, the team said. He is expected to miss four to six weeks.
Nelson was injured in the fourth quarter of Monday night's win against Charlotte. But he finished the game on the court and showed no signs of injury.
"I feel pretty good," Nelson said after the game. "My energy level just physically wasn't there, but mentally ... I think that's one of the parts of my game that adds toughness to this team."
This is the second straight season he has been sidelined.
Nelson injured his right shoulder in February and had surgery. In a surprise move, he returned for the NBA finals, struggling to regain his form as Orlando lost to the Los Angeles Lakers in five games. Nelson is averaging 13.7 points and 5.5 assists this season.
This is the latest in a series of setbacks this season for the Magic.
Rashard Lewis missed the first 10 games of the season, suspended by the NBA for testing positive for an elevated testosterone level. Vince Carter and forwards Ryan Anderson, Mickael Pietrus and Brandon Bass all have missed time with injuries, and backup center Marcin Gortat is out indefinitely with the flu.
After taking a year off, Williams has returned to give Orlando (8-3) a solid guard who brings energy off the bench. Williams, who helped the Miami Heat win the championship in 2005-06 as a starter, is averaging 5.4 points and four assists in 18.4 minutes.
The Magic were off Tuesday. They host the Oklahoma City Thunder on Wednesday, the same team that beat them by 28 points in their first meeting this season.