The 21-year-old lefty -- the Yankees' No. 1 prospect, as ranked by MLB.com -- has not pitched since May 18 with Triple-A Scranton/Wilkes-Barre and made just six starts this year, finishing 0-2 with a 4.50 ERA.
This spring, Banuelos and right-hander Dellin Betances were both mentioned as potential assets to help the club late this season, but those projections have not panned out. Banuelos was also slowed by an oblique injury, while Betances was demoted to Double-A Trenton after struggling with the organization's top farm club.
"It hurts," Yankees manager Joe Girardi said of Banuelos' setback. "I don't want to say it's a wasted year, but obviously he didn't pitch as much as we wanted him to. Can he make that up? Yeah, you can make that up, but who knows where he would have been if he had 150 innings this year?"
Banuelos was signed on March 30, 2008, and has struck out 9.2 batters per nine innings throughout his Minor League career.
The Yankees do not believe that Banuelos will require surgery.
It has been a rough week for Yankees prospects; outfielder Mason Williams had season-ending surgery to repair a tear in his left (non-throwing) shoulder and is expected to be ready for Spring Training 2013.
In 91 games with Class A Charleston and Class A Advanced Tampa, Williams batted .298 with 11 home runs and 35 RBIs. Williams will turn 21 later this month.