Benavides had been in contention for back-to-back Dakar wins as he sat fifth in the general classification following Tuesday's Stage 9, just 10 minutes back from leader and KTM teammate Matthias Walkner.
However, the Argentinian rider hit mechanical trouble a little over a third of the way into Stage 10, a 375km run between Wadi Ad Dawasir and Bisha, coming to a halt at the 133km mark.
Unable to fix the issue, Benavides has been forced to retire from the rally, ending his hopes of defending the 2021 crown he won with Honda.
However, under new Dakar rules, he will be able to continue with heavy penalties, which was the case for fellow KTM man Danilo Petrucci after the ex-MotoGP rider likewise suffered a breakdown on Stage 2.
Benavides' exit comes as a blow to KTM's hopes of taking back the Dakar bikes crown after two years of losing out to Honda.
Walkner and Toby Price are the remaining members of the Austrian marque's factory squad still in contention, although the latter started the day in ninth and some 35 minutes behind Walkner.
Sister marque GasGas had its sole remaining rider Sam Sunderland in second, 2m12s off the lead, while Benavides' brother Luciano sat 14th riding for another KTM-owned brand, Husqvarna.
