Coach Mike Smith said Monday that Williams tore the anterior cruciate ligament "and some other things" in his right knee in Sunday night's 21-14 win over the Chicago Bears. Smith said Williams faces reconstructive knee surgery.
On Tuesday, the team put Williams on injured reserve and signed free-agent safety Jamaal Fudge. Fudge returns after being released following training camp.
Williams is the second starter on defense to have a season-ending knee injury. Rookie defensive tackle Peria Jerry injured his left knee against Carolina on Sept. 20.
Smith said it would be difficult for the team to find help at cornerback through a trade before Tuesday's deadline.
"We'd have to be real quick," Smith said. "We've got some guys we feel are ready to step up into that role and it will be an opportunity for Tye Hill, Chevis Jackson and Chris Owens to get some more playing time. We'll have a different look with our 45-man roster when we get to Dallas this week."
Williams landed awkwardly on his right knee while defending a pass to Bears tight end Greg Olsen in the end zone in the fourth quarter. The pass fell incomplete.
On the following play, the Bears went after Williams' replacement, Jackson, who was beaten by Olsen on a 2-yard touchdown pass.
Cornerback was a major concern before the team added Williams and Hill before the season.
Williams earned a starting job after signing with the Falcons on Sept. 6.
"It's going to be a big loss for us but it's going to be an opportunity for another player on our squad," Smith said.
Williams played three seasons in Jacksonville, including two with Smith as defensive coordinator.
Williams' background with Smith helped him to quickly earn a starting job in Atlanta. The eighth-year veteran started each of the five games and had 15 tackles with an interception, a blocked punt, and a fumble recovery he returned 53 yards.
He started all 16 games for Jacksonville last season.
Houston and Grimes may be the most likely cornerback tandem against the Cowboys, though Williams' injury also creates an opportunity for Jackson and Hill.
"I don't know how it's going to work out, but I know we have a lot of talent in the secondary," safety Erik Coleman said.
Hill was acquired from St. Louis on Sept. 1 and has been inactive each week.
Hill, the 15th overall draft pick in 2006, missed most of the past two seasons with injuries. As a rookie, he started 10 of 16 games for the Rams and finished with three interceptions, four passes defended and one fumble recovery.
Smith compared Hill with Domonique Foxworth, who was acquired shortly before the start of the 2008 season and needed an adjustment period before he made 10 starts. Foxworth signed with Baltimore in the offseason.
"Tye had not gone through our OTAs and training camp," Smith said. "He was a late addition, similar to our situation last year with Domonique Foxworth. There is a learning curve and Tye has been working very, very diligently to learn our defense. He's going to get an opportunity this week to step in and compete for that corner position."
Smith said he would have no updates before Wednesday on backup running back Jerious Norwood (hip) and backup safety William Moore (hamstring). Neither returned after leaving Sunday night's game with injuries.
Information from The Associated Press was used in this report.