The nine-time world champion appeared to misjudge the start of Stage 5 which resulted in terminal damage to his M-Sport Ford Puma.
The Frenchman slid wide at the first corner of the Lousa 2 as the stage transitioned from asphalt to gravel, and as a result he hit a wall on the outside of the corner with the right rear.
Loeb slowed to a crawl following the impact before pulling off to the side of the road where the full extent of the crash was revealed. The impact had damaged the right-rear suspension leaving the right-rear wheel folded underneath the car.
The 48-year-old had made an impressive start to his first WRC event since winning the season opener at Monte Carlo in January.
Heading into the stage he held a 0.5s lead over Toyota’s Elfyn Evans after winning Stage 4, which had catapulted him from seventh and into the lead of the rally.
M-Sport has since confirmed that Loeb will retire from the rest of day’s action and it is unclear at this stage if he will return tomorrow.
“After clipping a wall at the start of SS5, Sebastien Loeb has stopped in stage. The crew are retiring for the day,” read a brief statement from the team on social media.
A post followed on Loeb own social media apologising for the accident.
Loeb’s long-time rival Sebastien Ogier won the stage for Toyota after beating M-Sport’s Pierre-Louis Loubet by 0.6s, while Hyundai’s Thierry Neuville was third-fastest.
Evans has now reclaimed the lead of the rally, with a 2.1s margin over Neuville after the Toyota driver finished the test with the fourth quickest time.
Ogier’s stage win has moved the eight-time champion to third overall while championship leader Kalle Rovanpera sat in fourth, 9.9s adrift.
The crews will tackle four more stages this afternoon.
