Faugheen will not defend his title in the Stan James Champion Hurdle at the Cheltenham Festival.
The brilliant eight-year-old is suffering with a suspensory ligament problem which is enough to keep him on the sidelines for the big meeting in March.
Mullins tweeted: "Unfortunately #Faugheen will not run @Cheltenhamraces. He has a sore suspensory ligament."
Faugheen was an odds-on favourite across the board to claim back-to-back victories in the Champion Hurdle, having this season claimed stunning victories in both the Christmas Hurdle at Kempton and in the Irish Champion Hurdle at Leopardstown.
Mullins revealed the injury came to light after he returned to work having enjoyed a short break following his Leopardstown triumph.
Mullins said: "We were just bringing him back. We had 28 days from yesterday to the Champion Hurdle and I said 'I better start doing a bit with him' and getting serious.
"He was just a little bit sore and our vet confirmed he had a small suspensory (injury) and I didn't want to risk going any further. I just took a view that it was better to stop now and he'd be back for next year.
"It's something like what happened to Hurricane Fly going to Cheltenham and he came back and was as sound as a pound for five or six years after.
"We think the prognosis is very good and he should be back as good as new next year."
Ruby Walsh has ridden Faugheen in 11 races, including at Cheltenham last year, and looked visibly shaken by the news of his enforced absence - moments after riding stablemate Annie Power to victory at Punchestown.
He told At The Races: "Willie told me on the way racing. It's disappointing.
"It's like someone whipping the ace out of the pack and handing you the rest of the cards."