Santos made two appearances with the Yanks after signing a Minor League contract on June 10, and he was placed on the 15-day disabled list on Friday with right elbow inflammation.
Yankees manager Joe Girardi said Santos was crushed by the news that he'll need surgery.
"He had the elbow issue last year, and he chose to rehab it and it manifested this year. It's disappointing because we saw what he was capable of doing down in Florida," Girardi said. "He's heartbroken. It was difficult for him."
Sergio's last appearance was a scoreless inning on June 15 in Miami.
Fellow pitcher Jacob Lindgren, who was optioned to Triple-A Scranton/Wilkes-Barre on June 13, is also battling an injury. The Yankees announced Sunday that he will undergo surgery on Monday and is expected to have a recovery time of 12 weeks maximum. Lindgren is having a bone spur in his left elbow removed.
In 14 appearances this season with the Dodgers and Yanks, Santos posted a 4.96 ERA with 18 strikeouts over 16 1/3 innings.
"He threw, what was it Tuesday in Florida? Or Monday? And he just thought, 'You know, I'm going to be fine,''' Girardi said. "He said he was a little tired Tuesday, and Wednesday he was surprised he didn't feel better. Then when he came in Thursday, we were really shocked and he was shocked, so it's really disappointing.
"We had in our eyes the way we were going to use him, and [with] how effective his slider was, it's a tough break."
Girardi had some words of comfort for his pitcher.
"As I told him, 'You'll get through this. You've been through other things, you'll get through this and be on the mound,''' Girardi said. "But it's hard when you're going through it."
Grace Raynor is an associate reporter for MLB.com.