The Dubai-based 28-year-old was evacuated back to the bivouac, the rally's travelling support and logistics centre.
KTM manager Alex Doringer told the Motorcycle News website that Sunderland was searching for a control point when he hit a big hole.
"He felt a sharp pain in his back immediately, but carried on for another 5km before stopping again due to the pain and a lack of feeling in his legs," added Doringer.
"He said that the feeling in his legs has returned, but he will now be transferred to Lima for more tests."
Sunderland had led by more than four-and-a-half minutes going into the 330km fourth stage in the dunes around the Pacific port of San Juan de Marcona.
His exit meant that Yamaha's French rider Adrian van Beveren took over the lead, one minute and 55 seconds clear of Chilean Pablo Quintanilla, after winning the stage.
Sunderland last year became the first Briton to win the Dakar, a gruelling endurance rally that moved to South America from Africa in 2009 for security reasons, in any category.
The rally ends in Argentina on Jan. 20 after also travelling through Bolivia.
(Reporting by Alan Baldwin in London, editing by Christian Radnedge and Toby Davis)
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