Sanchez, who rides for Euskaltel, came down hard on his shoulder and appeared to suffer a collarbone injury.
The Spaniard was attended to by medics before gesturing that he could not go on and, in tears, was taken away on a stretcher.
The official race doctor later said Sanchez had suffered "left shoulder trauma" but could not confirm whether his collarbone was broken.
Sanchez won the Olympic road race title in Beijing in 2008 and last year was crowned the King of the Mountains at the Tour after winning the climbers' competition.
The men's Olympic road race takes place on July 28, six days after the end of the Tour de France in Paris.
However Spain could struggle to align a team capable of challenging favourites like Mark Cavendish of Britain, Germany's Andre Greipel and Australian Matt Goss.
Spain's former three-time world champion Oscar Freire and Jose Joaquin Rojas, both sprinters, have both been forced off the Tour due to injury earlier in the week.
(For more sports news and updates, follow Ahram Online Sports on Twitter at @AO Sports and on Facebook at AhramOnlineSports)