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Smith, who won 110 caps for his country before retiring from international rugby in 2010, damaged the joint playing for the Brumbies against the New South Wales Waratahs last Saturday, the eve of the announcement of the preliminary Wallabies squad.
The 32-year-old, who played all three tests on the 2001 Lions tour, would have been included in the 25-man party after the Australian Rugby Union (ARU) had concluded protracted negotiations with his Japanese club Suntory last week.
The injury setback led to his omission, however, with Michael Hooper and Liam Gill named by Robbie Deans as the two contenders for the key No 7 shirt.
Ironically, Smith got his chance to shine at the Brumbies this year because of a season-ending knee injury to Australia's first choice openside flanker David Pocock.
Scans revealed Smith's medial ligament tear was grade two in seriousness, however, which could mean only six weeks on the sidelines and the possibility he might be available for the second of three tests against the Lions on June 29.
While that looks an unlikely option, an injury to Hooper or Gill, one of whom is likely to sit on the bench, would leave Australia short in a department where they boasted an embarrassment of riches at the start of the season.
Brumbies centre Pat McCabe has a far better chance of facing the tourists after a scan on the knee injury he suffered in Saturday's clash revealed there was no structural damage to the joint.
"It's a bit hard to put a time line at the moment," McCabe told reporters in Canberra.
"It's a matter of this swelling settling down and then I can start running and it won't be much longer. I'm almost walking normally now."
McCabe, a hard-running and direct inside centre, has won 19 caps under coach Robbie Deans and is a strong contender for one of the six spots remaining in the squad that will be announced on June 11.
The 25-year-old also extended his deal with the Wallabies and Brumbies for two years through to the end of the 2015 World Cup on Tuesday.
"It's been a privilege to wear the gold jersey and represent the country," McCabe said in a news release.
"One aspect of the team in the last couple of years is that most of the players have been of a similar age, so we've learnt together while having some great experiences."
