Fahey, who scored the opening goal of the qualifying campaign in Armenia, has been struggling with a groin problem since he joined up with the squad. Former Derby midfielder Paul Green, who is unattached, has been drafted in as a replacement.
The news came just hours after the Republic's 1-0 friendly victory over Bosnia at the Aviva Stadium.
A spokesman for the Football Association of Ireland said: "During the warm-up, Keith Fahey felt something not quite right. He was scanned following the match.
"The FAI medical team have just received the results of the scan which showed unfortunately that his groin strain was persisting. The results were discussed with the player and he agreed that would not recover fully in time for Euro 2012.
"As a result, he is departing from the squad and Paul Green is being called in. Giovanni Trapattoni spoke to the player, who is very disappointed to miss out on Euro 2012, and told him he remains part of his plans for the future."
A flurry of injuries were suffered in Saturday's friendly internationals.
There was concern for Spain's coach Vicente del Bosque as Barcelona midfielder Cesc Fabregas was ruled out for up to 10 days with a hamstring strain.
Poland, staging the finals with neighbours Ukraine, beat Slovakia 1-0 although there was some disturbing news for the hosts with second choice goalkeeper Lukasz Fabianski being ruled out with a shoulder injury.
Denmark goalkeeper Thomas Sorensen may not play in their opening Euro 2012 match against Netherlands after he was substituted in the first-half of the 3-1 defeat to Brazil with a back injury.
Gareth Barry will have a scan on Sunday on the groin injury that threatens to rule him out of Euro 2012. The England midfielder was introduced as a half-time substitute during England's 1-0 win over Norway, but he lasted barely half an hour before indicating he had suffered a problem which could cause new manager Roy Hodgson a major headache.
Netherlands defender Joris Mathijsen limped off during the 2-1 defeat to Bulgaria with a hamstring injury. "Joris felt something in his hamstring and wanted to avoid any risk," Bert Van Marwijk told reporters.
Coaches have to submit their official 23-man squads to UEFA on Tuesday.