Nicholas, who featured for the North London club between 1983 and 1987, believes that the knee injury sustained by Walcott in Arsenal's 2-0 FA Cup win over rivals Tottenham will be a huge loss as Arsene Wenger chases the club's first silverware since 2005.
Walcott, who suffered a ruptured anterior cruciate ligament, will now miss around six months, ruling him out of the rest of the season as well as England's World Cup campaign.
But Nicholas focused on the loss of Walcott from Arsenal's perspective, as an already underwhelming strikeforce became even weaker with the latest news, particularly with Olivier Giroud and Nicklas Bendtner also sidelined.
"Arsenal are going to miss him badly," said Nicholas. "If Theo had stayed fit until the end of the season, I think he would have got Arsenal the title because his pace can stretch defenders."
"We've got (Alex) Oxlade-Chamberlain coming back, we've got (Lukas) Podolski back and also the very talented (Serge) Gnabry, who I think will be able to replace Theo in that position, but he will not be able to replace the pace or the goals."
Nicholas also believes that Walcott's best position is on the right hand side, despite the former Southampton forward's requests to play as the central striker. The 24 year old got his wish on Saturday and turned in an impressive display as his pace troubled the Spurs backline on a number of occasions, but his chance has now evaporated before he was able to hold it down.
"I know he (Walcott) has always said he wants to play centre forward, but coming in from the right side, he's learnt to play the position really well over the years. His pace was the asset that the team will miss more than anything.
"The longer the season goes on the deeper the teams will get and I think that's the asset that Arsenal are going to miss and the goals they will certainly miss."
image: © Ronnie Macdonald