Additional Steps for Installing Istio on SUSE® Rancher Prime: RKE2 and SUSE® Rancher Prime: K3s Clusters
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 Rancher-Istio has been deprecated since Rancher v2.12.0; turn to the SUSE Application Collection build of Istio for enhanced security (included in SUSE Rancher Prime subscriptions). Detailed information can be found in this announcement.  | 
When installing or upgrading the Istio Helm chart through Apps,
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If you are installing the chart, click Customize Helm options before install and click Next.
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You will see options for configuring the Istio Helm chart. On the Components tab, check the box next to Enabled CNI.
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Add a custom overlay file specifying
cniBinDirandcniConfDir. For more information on these options, refer to the Istio documentation. An example is below: 
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RKE2
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K3s
 
apiVersion: install.istio.io/v1alpha1
kind: IstioOperator
spec:
  components:
    cni:
      enabled: true
      k8s:
        overlays:
        - apiVersion: "apps/v1"
          kind: "DaemonSet"
          name: "istio-cni-node"
          patches:
          - path: spec.template.spec.containers.[name:install-cni].securityContext.privileged
            value: true
  values:
    cni:
      cniBinDir: /opt/cni/bin
      cniConfDir: /etc/cni/net.d
apiVersion: install.istio.io/v1alpha1
kind: IstioOperator
spec:
  components:
    cni:
      enabled: true
      k8s:
        overlays:
        - apiVersion: "apps/v1"
          kind: "DaemonSet"
          name: "istio-cni-node"
          patches:
          - path: spec.template.spec.containers.[name:install-cni].securityContext.privileged
            value: true
  values:
    cni:
      cniBinDir: /var/lib/rancher/k3s/data/current/bin
      cniConfDir: /var/lib/rancher/k3s/agent/etc/cni/net.d
Result: Now you should be able to utilize Istio as desired, including sidecar injection and monitoring via Kiali.