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."