The versatile Austrian started alongside Antonio Rudiger in the heart of the Real backline against the Yellow Submarine, but his race was run after 35 minutes as he was helped off the field by the medical team.
Nacho Fernandez came on to replace the stricken Alaba, by which point Los Blancos had already taken the lead through Jude Bellingham before doubling their advantage through Rodrygo just two minutes after the enforced change.
Jose Luis Morales pegged a goal back for Villarreal early in the second period before Brahim Diaz and Luka Modric added gloss to the scoreline, but concern immediately turned to Alaba's condition.
Speaking to the media after the match, a pained Ancelotti confirmed the gut-wrenching news that Alaba had ruptured his ACL, which will rule the former Bayern Munich man out for the rest of the season.
Alaba now shares the same fate as Thibaut Courtois and Eder Militao, both of whom sustained ACL injuries in the earliest weeks of the season, and Ancelotti could scarcely believe that three of his troops had all sustained similar injuries in one campaign.
"Alaba has torn his ACL and it's very sad news. This is the first time it happens to me, three of my players tearing their ACLs... it's unbelievable," Ancelotti told reporters in his post-game press conference.
Real also confirmed that Alaba will undergo surgery in the coming days and will face a recovery period of between six and seven months, also putting him at risk of missing Austria's Euro 2024 campaign.
Ralf Rangnick's side have been drawn against France, the Netherlands and the winner of playoff Path A in a daunting Group D, where matches will take place from June 16 to June 25 next summer.
Alaba has been a vital member of Ancelotti's squad since ending his 13-year spell at Bayern Munich in 2021, registering five goals and nine assists in 102 games for Los Blancos and starting 14 La Liga contests in the current campaign.
As well as fellow ACL victims Courtois and Militao, Alaba also joins Vinicius Junior (hamstring), Eduardo Camavinga (knee), Dani Carvajal (calf), Ferland Mendy (muscle) and Arda Guler (thigh) in the well-occupied Real treatment room.
Mendy was another casualty of the win over Villarreal, coming off at half time with a muscular injury, while Camavinga - another left-back option - will not be back from his own knee issue until February in the best-case scenario.
The injuries to Mendy, Alaba and Camavinga means that Real are left with Fran Garcia as their only senior left-back option, and Ancelotti has confirmed that his side will try to bring reinforcements to the club next month, adding: "We will see in the next days if we can sign someone in January."
Los Blancos have been heavily linked with a move for Alaba's former Bayern teammate Alphonso Davies, who could be sold by the Bavarian giants if he refuses to commit to a new contract, but a January deal is unlikely.
Real's thrashing of Villarreal moved Ancelotti's men one point clear of Girona at the top of the La Liga table before the surprise package take on Alaves on Monday night.