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UPDATE 1-Blackstone cancels $2.8 bln Australian mall sale on weak interest - source

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* Sale canceled due to lack of buyer appetite - source

* Retail sentiment unnerved by pending arrival of Amazon.com

* Blackstone to focus on managing 10-mall portfolio (Adds quotes, Blackstone not immediately available, background and advisors)

SYDNEY, Sept 5 (Reuters) - Private equity giant Blackstone Group canceled the sale of a A$3.5 billion ($2.8 billion) Australian shopping mall portfolio after it was unable to find a buyer, a source familiar with the matter said on Tuesday.

"They pulled the sale process last week. The rationale was that with the level of market demand, they decided to focus on active management," said the source, who asked not to be named because they were not authorized to comment publicly.

"They had strong offers, but only for individual assets, not for the whole 10 (malls). There's been a hit on retail-sector sentiment because of the emergence of Amazon," added the source.

A Blackstone spokeswoman did not respond to an emailed request for comment.

The U.S. group put its Australian portfolio of 10 shopping centers, mostly in Sydney and Melbourne, on the market in April, drawing criticism from analysts who said the firm had missed the peak of the market.

Blackstone's assets, mostly acquired in 2011 when the firm swooped on troubled property firms Valad Property Group and Centro Properties, are mostly suburban shopping centers, making them more vulnerable to competition from online retailers.

Australian mall owners, particularly on the east coast, have for years benefited as steady population growth supported retail spending and a booming real estate market pushed land values ever higher.

But signs of a slowdown are starting to show, while bricks-and-mortar retailers are also seen facing new competition after U.S retail giant Amazon.com announced plans to launch its online shopfront Amazon Marketplace in Australia.

UBS and JP Morgan had been mandated to run Blackstone's Australian portfolio sale, along with real estate agent Jones Land LaSalle (JLL). A JP Morgan spokesman had no comment and spokeswomen for UBS and JLL did not immediately respond to requests for comment. ($1 = 1.2582 Australian dollars) (Reporting by Tom Westbrook; Editing by Richard Pullin)