Hornets coach Jeff Bower said on Monday that an MRI revealed more damage to the knee than the initial diagnosis of a bruise. The coach refused, however, to confirm reports that Paul had a meniscus tear and would miss at least a month.
Sources close to the situation confirmed to ESPN.com on Sunday that Paul tore cartilage in his left knee and will be forced to undergo arthroscopic surgery.
"We're in fact-finding stages right now, gathering as much information as possible for decisions to be made to take the next steps," Bower said. "It is likely there will be a surgical solution for it. We don't have a timetable [for Paul's return] right now, nor do we know a surgical procedure right now."
Paul first hurt his left knee in a game at Golden State on Wednesday. He struck the same spot against a camera when he went out of bounds near the end of regulation against the Chicago Bulls on Friday night.
He missed the Hornets' game at Memphis on Saturday.
Yahoo! Sports, citing unidentified sources close to Paul, reported that test results showed a partially torn meniscus and that he would miss one to two months.
This will be Paul's second extended absence of the season. An ankle injury cost him eight games soon after Byron Scott was replaced as coach by Bower, but the Hornets managed a 4-4 record during that stretch.
After Paul tweaked the knee on Wednesday at Golden State, it appears he suffered the tear Friday night in a home overtime loss to the Bulls following a scramble for a loose ball and a hard landing on the baseline in the final seconds of regulation.
Rookie Darren Collison, averaging 6.8 points and 3.2 assists, will start in Paul's place. Collison handed out a Hornets rookie-record 18 assists and scored 17 points on Saturday when New Orleans ended Memphis' 11-game home winning streak with a 113-111 overtime victory.
After starting slowly, the Hornets have won 13 of their last 17 games and were tied for the eighth spot in the Western Conference entering Monday night's home game against Phoenix.
In nine games as a starter, Collison was averaging 15.1 points and 7.7 assists.
"It's nothing I haven't seen before," Collison said. "We've been jelling with Chris, and without him I don't think it's going to stop us."
When Paul is formally ruled out of the All-Star Game, his replacement on the Western Conference roster will be chosen by NBA commissioner David Stern. Prime candidates to replace Paul at guard include Denver's Chauncey Billups and Golden State's Monta Ellis.
ESPN.com senior NBA writer Marc Stein and The Associated Press contributed to this story.