It was a huge disappointment for the 37-year-old who had been hoping to repeat his victory last year.
The Citroen driver from Dungannon had been in a battle for the lead with Jari-Matti Latvala and Hayden Paddon.
M-Sport driver Ott Tanak of Estonia leads by 4.6 seconds, ahead of Dani Sordo and Sebastian Ogier.
Meeke had been running in second position before the midday break, hitting the front on the first stage of the afternoon.
He stopped with a puncture on stage seven, the longest of the day, however the battle to fix his C3 was in vain as he was then forced to retire with left-rear suspension damage.
Toyota driver Latvala rolled at the beginning of SS7, while Paddon lost nearly 11 minutes with a mechanical problem.
It has been another disappointing day for Citroen, who only have Waterford driver Craig Breen in the top five as team-mates Stephane Lefebvre and Khalid Al Qassimi both hit problems.
Northern Ireland's Kris Meeke is out of the World Rally Championship round in Portugal after suffering suspension damage near the end of day two.