The Volkswagen driver had begun the day by extending his advantage over team-mate Sebastien Ogier to nearly half a minute with a win on the Monte Olia stage.
But on the following 59km-long Monte Lerno, Latvala's engine temperatures shot up to dangerous levels and he began to prepare to retire, switching the car into road mode and slowing down.
Then the problem appeared to clear and as the engine cooled, Latvala got back on the pace and came through the stage having lost 11 seconds to Ogier, leaving his lead at 17.7s.
Ogier felt he could have taken more time out of Latvala had he not eased off when told over the radio that his team-mate was retiring, only to then learn that this would not be the case.
VW looked set to swiftly move into a top-three sweep when Saturday's stages began, with Andreas Mikkelsen ending day one right on the tail of Mads Ostberg's Citroen for third.
But Ostberg responded in the morning and beat Mikkelsen on both stages, re-establishing a 9.4s cushion.
Robert Kubica remains fifth and has pulled away from M-Sport team-mate Elfyn Evans.
Leading positions after SS11:
Pos Driver Team/Car Time/Gap 1. Jari-Matti Latvala VW 2h40m07.9s 2. Sebastien Ogier VW +17.7s 3. Mads Ostberg Citroen +1m10.8s 4. Andreas Mikkelsen VW +1m20.2s 5. Robert Kubica M-Sport Ford +2m21.4s 6. Elfyn Evans M-Sport Ford +3m03.4s 7. Martin Prokop Czech Ford +3m25.6s 8. Henning Solberg Solberg Ford +4m07.0s 9. Hayden Paddon Hyundai +8m23.9s 10. Nasser Al-Attiyah M-Sport Ford +9m44.3s*
- Sports & Recreation
- Sebastien Ogier
- Andreas Mikkelsen