The 28-year-old has a bone growth in his left knee which has been causing him some pain for the past six weeks while on duty for English Premier League club West Ham United.
The injury has worsened and reached the stage where Reid was only training once a week, prompting an operation.
His expected recovery time is eight to 12 weeks.
Suspension, injury and unavailability have dogged Reid's international career.
He has appeared in just 21 of a possible 50 games since his All Whites debut in 2010 and has played in only four of the last 20.
"Obviously I'm really disappointed to be missing the Confederations Cup, but if I had gone there and played, it would not have got better," Reid said.
"If the Confederations Cup was nine or 10 days away, I'd probably have given it a go, but the fact it is another month away and it's not getting any better made my decision."
Leeds United striker Chris Wood will take over the captaincy, as he has done in most of the recent matches Reid has missed.
All Whites coach Anthony Hudson said Reid was "devastated" to miss the eight-nation tournament in Russia, along with the All Whites' extended preparation period.
They gather in Auckland this week for a training camp and play three warm-up matches in June ahead of the Confederations Cup opener against Russia on June 17.
"It is not only disappointing for us but it is disappointing for him," Hudson said.
"It was a tournament that our captain wanted to be a part of, but not only be a part of but to do something significant so I feel pretty bad for him."
Hudson is hopeful Reid will be fit for the Intercontinental play-off in November against the fifth-placed South American side, should the All Whites qualify for those matches.
He is hopeful Reid will be fit for the Intercontinental play-off in November against the fifth-placed South American side, should the All Whites qualify for those matches.
