The fly-half playmaker will miss the rest of the tournament after tearing a groin tendon during New Zealand's final training session in Wellington before tackling Canada.
Carter, who has amassed a record 1250 points during his 85-cap Test career, had been due to captain the All Blacks in their final Pool A fixture while regular skipper Richie McCaw rested a foot injury.
Carter, the world's leading number 10, was hurt during a kicking drill at Wellington Regional Stadium. He immediately slumped to the floor in agony, and the All Blacks' worst fears have now been realised.
Manawatu back Aaron Cruden has been called into the All Blacks World Cup squad by Henry, with Colin Slade starting at fly-half against Canada.
"It is devastating for Daniel," Henry said.
"He has been a world-class player for a long time, probably one of the greatest players ever produced by this country.
"This was going to be his pinnacle, the Rugby World Cup. We've had a lot of focus on this tournament for the last couple of years, and it is devastating he cannot be involved in that.
"It is a tragic situation for a highly-talented young sportsman. This was his scene, really - a World Cup in New Zealand and it was going to be his big occasion.
"He doesn't talk that way, it's the coach talking, so I feel very sad for him.
"He is the type of guy who will handle this as best he can and he's got a huge strength of character. He is a key All Black, not only on the field as the navigator of this team for a long time, but a key person off it.
"He's got great character and I just feel huge sympathy for him and his situation.
"The group is obviously very shattered with this news, but they are also a very resilient group of people focused on doing this job right."
All Blacks team doctor Deb Robinson said a scan showed 29-year-old Carter to have torn the adductor longus tendon in his left groin.
Such has been the impact of Carter's injury in New Zealand that the country's main television channel changed its schedule for a midday news special on him.
Robinson said: "The scan confirmed our worst fears that the tendon has torn, which means he is out of the tournament. He has torn the tendon completely.
"At the moment, the plan is that he will come to Auckland with us tomorrow (Monday) and we will seek a specialist opinion about his management options.
"Surgery may be an option, but we obviously haven't had that opinion yet, and when we do, we will come to some conclusions after that."
New Zealand remain favourites to land their first world title since the inaugural tournament in 1987, but Carter's absence is likely to make that task infinitely tougher.
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