Smith, South Africa's Test captain, has had long-term problems with his left ankle and needed surgery in the past but the injury flared up again in the home one-day international series against Pakistan in March.
The 32-year-old was playing for English county Surrey but would return home after scans in London on Wednesday showed a stress fracture to the troublesome ankle, Cricket South Africa said in a statement.
The left-handed batsman would require surgery and could need up to six months to return to the field again, South Africa team manager Mohammed Moosajee said.
"Graeme has been troubled by left ankle pain over the last few months and despite extensive treatment and physiotherapy, it has recently deteriorated significantly while playing for Surrey in England," he said.
"He underwent a rescan of his left ankle in London on Wednesday, and it was determined that since his last scan, the condition has progressed to a stress fracture.
"Surgery will be required, and he has been advised to follow a rest and rehabilitation programme over the next four to six months.
"This unfortunately rules him out of the upcoming ICC Champions Trophy in England and Wales and the selectors will name a replacement in due course."
The top-ranked Test team in the world will be led by AB de Villiers in the Champions Trophy as South Africa aim to leave behind their past failures in ICC tournaments.
"It's a big blow for me personally to be missing out on the Champions Trophy next month. The ODI squad is creating something special and I was looking forward to being part of that family," Smith said.
"I will no doubt be supporting from my living room and I know the players, under AB's leadership will be giving all that they can during the tournament."
South Africa are in Group B and will play the opening match of the June 6-23 tournament against India in Cardiff. Pakistan and West Indies are the other teams in the group.