Chandler suffered a labral tear during the preseason and did not play in any of Denver's first seven regular-season games. He will endure a six-month rehab process but is expected to make a full recovery.
"While we are extremely disappointed by the news, we are confident that Wilson will be at full strength to start next season," general manager Tim Connelly said. "Wilson is one of the league's elite workers and we are going to be there for him during this entire process."
Chandler, 28, signed a four-year, $46 million contract extension this summer.
"I'm incredibly disappointed," Chandler said. "I put in so much work over the summer to make myself a better player. I dedicated my whole summer to self-improvement and all I had on my mind this offseason and preseason was `This was my year.' I was going to help this team win. So this is very frustrating and heartbreaking to say the least."
Chandler has battled injuries since coming to Denver as part of the deal that sent Carmelo Anthony to New York in February 2011. He missed 13 of the last 14 games of the 2011-12 season and then 35 games of the 2012-13 season with a right hip injury.
He returned in January to average 13.1 points and 5.1 rebounds in 43 games for the Nuggets, who finished with a franchise-best 57 wins.
Denver was counting on Chandler to play a big role this season, the first under coach Michael Malone.
"No one has worked harder, and to see him miss our entire season is devastating," Nuggets president Josh Kroenke said. "I know how badly he wants to be on the court helping his teammates."
Last season was his best since 2008-09, when he was with New York. Chandler averaged 13.9 points and 6.1 rebounds in 78 games, the most he played since that season.
Chandler, the Knicks' first-round pick in 2007, is averaging 13.7 points and 5.3 rebounds in his eight-year career.