The 23-year-old Chelsea right-back's season has been blighted by injury, with James missing the World Cup in Qatar due to a knee problem.
He came off the bench as 10-man England completed a 2-1 victory against reigning champions Italy in Thursday's European qualification opener -- his first cap since September.
But he has now been ruled out of Sunday's Group C match at home to Ukraine.
"Reece James has withdrawn from the England squad and will not feature against Ukraine on Sunday," a Football Association statement read.
"The full-back has returned to Chelsea for assessment on an ongoing issue."
James follows Marcus Rashford, Mason Mount and Nick Pope in withdrawing from manager Gareth Southgate's initial squad, with the FA adding Saturday that "no replacements are planned".