The Spaniard's withdrawal was the second major abandonment of the 101st edition of the Grand Boucle following that of reigning champion Chris Froome last Wednesday.
Contador crashed around the 65km mark of the mountainous 161km stage from Mulhouse to La Planche des Belles Filles.
The 31-year-old received lengthy treatment by the side of the road to patch up his injured right knee before he changed bikes and carried on.
He had lost around four minutes on the peloton by this time, after which his main rival Vincenzo Nibali's Astana team took over pace-setting at the front.
Despite five of his Tinkoff-Saxo teammates dropping back to help pace him back, he started losing more time.
Around 15km later and about halfway through the stage, Contador shared a hug with chief lieutenant, Australian Michael Rogers stopping by the side of the road and climbing into a team car.
He was in floods of tears.
On Wednesday Briton Froome crashed twice before climbing off his bike and quitting the Tour.
He had already injured his wrist the previous day in a crash and an MRI scan on Thursday showed he had fractures to his left wrist and right hand.