* Sale canceled due to lack of buyer appetite - source
* Retail sentiment unnerved by pending arrival of Amazon.com
* Peak passed for Australian property - fund manager
* Blackstone to focus on managing 10-mall portfolio (Recasts, adds fund manager and analyst quotes, background)
SYDNEY, Sept 5 (Reuters) - Private equity giant Blackstone Group has called off the sale of its A$3.5 billion ($2.8 billion) Australian shopping mall portfolio, a source said, as the looming arrival of Amazon.com spooks buyers of bricks-and-mortar stores.
With no interest in the entire 10-mall package, the canceled sale is also the latest sign of stress in Australia's east-coast real estate market, where population growth and booming property prices have underpinned landlords' profits for years.
Blackstone, the world's biggest alternative asset manager, walked away from the sale last week and will renovate the malls instead, a source with direct knowledge of the matter told Reuters on Tuesday.
"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, who was not authorized to speak publicly.
A Blackstone spokeswoman declined to comment.
Blackstone's assets, suburban shopping centers mainly in Sydney and Melbourne, were mostly acquired in 2011 when the firm swooped on troubled property players Valad Property Group and Centro Properties.
Since then, Australian retail landlords such as Scentre Group and Stockland Corp Ltd have enjoyed steady profits as population growth supported retail spending and a booming real estate market pushed up land values.
But Blackstone's move to put its malls on the block in April came just as the property market hit a peak and as Amazon announced the planned launch of its online shopfront service in Australia.
Home price rises have since cooled or even reversed in Sydney and Melbourne after years of steep gains, while sluggish wages growth has slowed sales for retailers who rent mall stores.
"The lay of the land had shifted I suspect," said property investor Winston Sammut, managing director of Folkestone Maxim Asset Management.
"Of course you want to sell at the peak and I think it looks like the peak has passed."
Seattle-based Amazon has yet to fully explain its strategy in Australia, but mere mention of the behemoth's arrival has roiled the share prices of retailers and retail landlords.
Blackstone's portfolio is seen as particularly vulnerable because investors view its malls as lower quality and comparable to the swath of second-tier shops that have shuttered in the United States due to online competition.
"Australia does not have the oversupply of malls that the U.S. has, but you get the picture," said Sholto Maconochie, head of real estate research at brokerage CLSA.
"It's a tough ask to get a portfolio sale away at book value in our view." ($1 = 1.2582 Australian dollars) (Reporting by Tom Westbrook; Editing by Richard Pullin)