The nine-time world rally champion, who lost his way and precious time in the desert on Monday, finished the 417km stage from Ha'il to Al Ula four minutes and 14 seconds ahead of Sainz despite being slowed by two punctures.
Sainz's lead over the Prodrive Hunter driver, who is chasing his first overall win in the endurance event, was trimmed to 20 minutes and 30 seconds.
"The gap is still big, but we still have three stages to go. So, we'll see and we'll continue to push for the next three days," said Loeb.
Brazilian Lucas Moraes was in third place overall for Toyota but an hour and 12 minutes off the lead.
Triple Dakar winner Sainz was helped by teammates Mattias Ekstrom and Stephane Peterhansel, the former going ahead to open the road and the latter following Sainz in case assistance was needed.
"At the end, it was very stressful inside the car and very difficult to navigate. The three cars were together, so it was good, I knew I had some support behind me," said Sainz, the father of the Ferrari Formula One driver and namesake.
Peterhansel, a record 14-times Dakar winner on two wheels and four, said he saw Sainz hesitate a few times during the last 200km when having to lead.
"Carlos is in a good position. But Sebastien is capable of recovering 10 minutes a day, or even more if he goes to the limit," said the Frenchman.
"So, I can understand why Carlos is stressed. Having 20-25 minutes is good, but if you have a technical problem, you lose them very quickly."
Both Ekstrom and Peterhansel are out of contention for overall victory, with Audi bidding to become the first to win the event with an electric drivetrain.
The car uses an energy converter, featuring a 2.0 litre four-cylinder turbo engine, to charge the car's high-voltage battery while driving.
In the motorcycle category, Honda's Adrien Van Beveren took his second stage win of this year's event with American teammate Ricky Brabec second.
Brabec extended his lead over Botswana's Ross Branch, fifth over the stage, from 42 seconds to seven minutes and nine seconds.
"I made a couple of stupid mistakes, but that's the first bad day of the rally for me, so we'll take it," said Branch.
"The pressure is kicking in now for everybody. It’s crunch time and I would have liked to have been up there a little bit closer today, but that's racing."
