The 24-year-old was carried off during the Gunners' 2-0 FA Cup win over Tottenham on Saturday and it has since been revealed that he will miss six months due to an anterior cruciate ligament injury to his left knee.
Walcott went to the 2006 World Cup but failed to make an appearance and was omitted from the 2010 squad for South Africa.
The forward will now be forced to miss a third finals and Parlour, who himself never made in a major tournament, feels it will be a massive blow to both player and country.
"What a really big injury this is for Arsenal and England because I'm sure Theo would have been a starter for England in Brazil," he told Sky Sports News.
"And it must be a massive blow for himself because he's playing in a very good team at the moment, top of the league, and looking forward to Brazil.
"He must be absolutely distraught about the extent of the injury."
Parlour added: "He'll be absolutely distraught losing the rest of the season and obviously missing the World Cup which is the best tournament to ever play in."
The news will be desperately disappointing for Gunners boss Arsene Wenger, who may be forced to bolster his options in the January transfer window as a result of his striker shortage.
Walcott was given a rare outing up front against Spurs, with Olivier Giroud ruled out due to illness and Nicklas Bendtner expected to miss all of January with his ankle problem picked up when scoring a late goal in the 2-0 win over Cardiff on New Year's Day.
"He's a very important player for Arsenal this season and Arsene Wenger will be looking at it," added Parlour.
"That's another striker. After losing Bendtner, Giroud is injured, Walcott - who can play up front - he's injured now.
"I'm sure Arsene Wenger now says to the board or whoever is involved in the transfer policy: 'we definitely need at least one or maybe two strikers to come into the club'."
Walcott's Arsenal team-mate Aaron Ramsey was quick to offer his condolences.
"Gutted for Theo, he'll come back stronger after this. Been fantastic for us so far this season. Have a speedy recovery mate," the Welshman wrote on Twitter.
Former Arsenal full-back Nigel Winterburn believes Walcott's absence from the World Cup will give England manager Roy Hodgson a headache.
"We've got players that can play on that right hand side but the problem is you want all your top players," Winterburn told Sky Sports News.
"You want players that can change a game, individually and collectively.
"A lot of people talk about Theo Walcott, saying 'he can't do this, he can't do that'. But his pace frightens defenders and his finishing is dramatically improved over the last couple of seasons.
"He will be a big, big loss to England."
Unlike Parlour, Winterburn believes Arsenal manager Wenger will not be in any rush to strengthen his striking options.
"For me they need a recognised centre-forward to compliment Giroud if he picked up an injury or he had a loss of form," he added.
"I don't think, because Theo's out, that Arsene Wenger will naturally go into the transfer market.
"If he can find a centre-forward that plays in the Barclays Premier League or if he can find someone who he thinks can really complement the squad, then he would go into the transfer market and get that player but I don't think Arsene Wenger tends to panic buy."
Walcott's Arsenal team-mates Mikel Arteta and Kieran Gibbs also tweeted their support.
Arteta, @m8arteta, wrote: "So sad for #Walcott , i know what is like! We will support you till u get back! U will be badly missed!"
Gibbs, @KieranGibbs, added: "Gutted for Theo...get well soon mate. #AFC".