The fight was set up between second-ranked Prochazka and third-ranked Ulberg after former champion Alex Pereira vacated the title to move up to heavyweight.
With 31 finishes from 39 fights, Prochazka is regarded as one of the most exciting fighters in the UFC and went into the contest as the favourite.
Ulberg, meanwhile, who grew up in foster homes before transitioning to martial arts after a spell in rugby league, earned the opportunity after knocking out former title challenger Dominick Reyes in September.
Fan favourite Prochazka was serenaded by “let’s go Jiri” chants in the early stages, as Ulberg attacked with leg kicks.
But Ulberg was soon in difficulties with his knee following an awkward landing while falling backwards.
Prochazka appeared to invite Ulberg to stand and trade blows, with the New Zealander ignoring the offer.
With Ulberg backing up against the cage, Prochazka stepped in while throwing punches but was caught by a flush counter left hook.
With fans at octagon-side on their feet in shock and excitement, Ulberg then pounced on the fallen Prochazka to reign down punches as the referee stopped the fight.
UFC president Dana White said in his post-fight news conference that the injury could be Ulberg’s anterior cruciate ligament (ACL), while commentator Daniel Cormier said Prochazka would have won had the fight gone past the first round.
“If he went to his corner, this fight would have been done. His knee is blown out, he can’t even stand,” said Cormier.
The UFC will be hoping Ulberg’s injury is not serious, with ACL tears usually taking more than nine months to heal fully following surgery.