The former world No.2 is in equal second spot heading into the final round at Royal Melbourne on Sunday after a sparkling five-under 66, highlighted by an eagle on the 14th to sit at 12 under.
Putting on a short game masterclass, Smith had the sole lead with a birdie on the 17th, with his big gallery among the 30,187 fans on the sandbelt course showing their full appreciation.
But he dropped a shot on the 18th while overnight leader Rasmus Neergaard-Petersen reclaimed the front-running with four birdies in his last five holes as he also posted a 66.
With the Dane at 13-under, Smith is in a group two shots back alongside fellow LIV golfer, Mexico's Carlos Ortiz (66), and South Korean Si Woo Kim (65).
Australians Adam Scott (68) and Lee (69) are both at 10-under, while Lucas Herbert had one of the rounds of the day with a 65 to sit another two shots back.
Lee was third after the second round but sank down the leaderboard on the back of four bogeys, with three coming on the front nine amid some wild shots off the tee.
But the West Australian delivered under pressure, nailing four successive birdies between 12 and 15 to remain a major threat.
Tournament drawcard Rory McIlroy is five-under heading into the final day, his third round hindered by a double-bogey on the second hole when his ball was bizarrely caught under a discarded banana peel.
The grand slam winner again produced a stellar back nine with four birdies for a 68 but his tournament hopes are all but over, nine shots off the pace.
Smith arrived at Royal Melbourne after a string of missed cuts in 2025 - including at all four majors and the recent Australian PGA Championship in Brisbane.
His slump started 12 months ago when he imploded during the second round of the Australian Open, starting the day one shot off the lead and ending it eight shots back.
The 2022 British Open champion was a regular figure on the driving range and practice putting green this week, determined to find some form, and his hard work appeared to finally pay off.
The 32-year-old matched the leaders with a birdie on the par-four 12th and then emerged as the sole front-runner two holes later when he  chipped in to eagle the par-five 14th.
It looked like he would take the lead into the final round before his bogey on 18 and Neergaard-Petersen's late surge.
17°C