Peugeot confirmed that mechanics would be unable to complete the job in the allotted time.
"It is obviously devastating to have to retire. We had been running at a good pace since the start of the rally," said Sainz, who had been in second place overall at the start of the stage, in a statement.
"I am so disappointed that I won’t be able to reap the benefit of its potential," the 2010 winner said of his Peugeot 3008 car.
This year's Dakar, one of the world's toughest endurance challenges which ends in Buenos Aires on Jan. 14 after stages in Paraguay and Bolivia, has seen a spate of high-profile retirements already.
Twice winner Nasser Al-Attiyah of Qatar retired after ripping a wheel off his Toyota in the third stage while reigning motorcycle champion Toby Price of Australia was flown to hospital on Thursday with a broken leg.
Five-times bike champion Cyril Despres of France is leading the car standings for Peugeot after winning Thursday's high-altitude stage.
The Dakar Rally started out as a gruelling race from Paris across the Sahara to the Senegalese capital but switched to South America in 2009 for security reasons.
(Reporting by Alan Baldwin, editing by Ed Osmond)
