She had refused to rule out returning to the court for the United States' match against Czech Republic but officially put an end to that on Wednesday.
Williams will hope that the injury will not scupper her plans for the Australian Open, which starts in Melbourne on January 18.
"I have some knee inflammation that's going away very slowly. It's going, it just needs a little more time," Serena had told reporters after retiring against Wolfe.
"Maybe a day off or two will really make the world of difference.
"It's not even a bump -- just a really minor thing in the road and I'll fly over it."
Williams, who was using the event as preparation for her tilt at a 22nd grand slam singles title, will be replaced in the U.S. team by 20-year-old Vicky Duval.
(Reporting by Sudipto Ganguly in Mumbai; editing by Alan Baldwin)
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