The Spaniard, who was expected to be a key domestique for team-mate Nairo Quintana, crashed at high speed on a left-hand bend made slick by heavy rain in Düsseldorf.
Valverde hit the deck on his left side, sliding across the road and into the bottom of a barrier. He abandoned immediately, with the team suspecting a broken patella.
"He’s going to the hospital right now," Movistar sports director Vincente Garcia said immediately after the stage.
"The biggest problem is his knee cap which seems to be broken and because of the crash against the barrier he also has a deep cut on his leg. There is a lot of blood in there so they had to clean it out before doing the x-ray to see whether he's broken any other bones."
The results of the x-ray were that Valverde had indeed suffered a broken knee cap, as well as breaking the talus bone in his ankle.
Doctors operated on the knee cap on Saturday night, with the timing of his return home still to be confirmed. Movistar doctors say that the injuries make it unlikely that Valverde will race again this season.
Garcia went on to say that he hoped the loss of Valverde, who has finished in the top 10 in GC for the previous four years, would not have any impact on the team's support for Quintana.
"The show must go on, and we are still able to ride a very good Tour with eight riders."
Team leader Nairo Quintana said that it was a great shame to lose an important domestique, and hinted that Movistar may have to change their approach to the race as a result.
"It's very sad for the team, and it's a real shame for the race," the Colombian said.
"We have to adapt our strategy after losing someone as important as Alejandro. He was one of the most important pieces that we had on the team.
Quintana also said that his own time loss on the opening stage, finishing 48 seconds behind stage winner Geraint Thomas and 34 seconds behind Chris Froome (both Team Sky), was partially due to him taking fewer risks after Valverde's crash.
"Froome took some important gains today on everyone. But looking at what happened with Alejandro, we decided to take our foot off the gas a little bit, finish the race the best way possible, and limit our losses."
Valverde was one of a number of riders to crash in wet conditions in Düsseldorf, with many sliding out on the same corner in the centre of the city.
Ion Izagirre (Bahrain-Merida), a former team-mate of Quintana at Movistar and a rider who was targetting the top 10, also fell on the same bend and was forced to abandon. The Spaniard suffered a fracture to his lower back in the crash.
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