Williams suffered the injury against Georgia on Saturday and the Welsh Rugby Union announced on Tuesday that the 26-year-old back will be sidelined in Cardiff this weekend.
His absence is a blow to Wales after he caused the All Blacks numerous problems while playing for the British and Irish Lions earlier this year.
Williams, who can cover the full-back or wing position, is not Wales' only absentee.
Winger Alex Cuthbert has been released because of a calf injury and the WRU has not put a timescale on either player's return.
"Liam Williams (abdominal) & Alex Cuthbert (calf) have been released from the Wales squad due to injury," a message on the WRU's Twitter account said.
New Zealand have won their last 29 meetings with Wales, who laboured to a 13-6 win over Georgia in Cardiff last weekend.