Casey, who was five strokes behind Montgomerie on the 10th tee, used a strong back nine to climb to 15-under-par 204. Monty was hot early, but was just even par over his final 10 holes. He carded a 4-under 69 at stands at minus-14.
Thomas Bjorn and Brett Rumford each posted 6-under 67s to move into a share of third place at 12-under-par 207. They were joined there by Soren Hansen (68).
Alastair Forsyth (67) and Andrew Marshall (69) are one stroke further back at minus-11.
Montgomerie, who celebrated his 43rd birthday Friday, opened with a 5-foot birdie putt on the second. He sank back-to-back birdie putts from inside 3 feet from the sixth to climb to 13 under.
The Scotsman made it three straight as his 14-footer for birdie on eight on the PGA Centenary Course at The Gleneagles Hotel fell into the cup.
Meanwhile, Casey had tripped to a bogey at the third. He came right back with a long birdie putt on the fourth, then birdied the sixth for the third straight day to get to minus-9.
Casey made the turn at 10 under as he got up and down for birdie at nine. Casey moved within two of Montgomerie as he drained an eagle putt from about 30 feet out at the par-5 12th.
Montgomerie was unable to match the eagle, but did drop in a 10-footer for birdie to move to 14 under.
The big turnaround came at the par-4 14th. Casey drained a birdie putt from over 30 feet away to get to 13 under. Meanwhile, Montgomerie short-sided himself with a his approach.
Montgomerie blasted his third across the green, then two-putted for bogey.
'After he hit a difficult patch at 14, the conversation stopped really,' said Casey of his talking with Montgomerie. 'That was a big two-shot swing that I thought was important. He didn't hit a great second shot in there and ended up making a good bogey. I had to take advantage of that.'
Montgomerie's lead was now one and he went on to two-putt for par on the final four holes to end at minus-14.
Casey joined the Scotsman in the lead as he got up and down for birdie on the par-5 16th. Casey, a 2004 Ryder Cup teammate of Montgomerie's, took advantage of the par-5 closing hole.
The 28-year-old knocked his second shot to the par-5 18th onto the putting surface. Casey two-putted for birdie from there to grab the overnight lead.
'My putting pleased me the most. I hit the ball okay in places. I got myself in trouble early in the round, but battled through that,' stated Casey. 'I kept grinding away and a couple of birdies came my way. I holed a few putts out there though, which was nice and put me atop the leaderboard.'
Casey, a five-time winner on the European Tour, holds the 54-hole lead for the ninth time in his career. He has won two of the previous eight times he has led entering the final round.
'I was just chasing Monty all day. I quite enjoy chasing,' admitted Casey. 'I'll be one ahead going into Sunday, but I've got Monty hot on my heels. At some point, I'm sure he'll catch me early on. But its just going to be fun tomorrow, it's a simple as that.'
Peter Baker carded a 4-under 69 to move into eighth place at 9-under-par 210. Ross Fisher and Carl Suneson are one shot back at minus-9.
Defending champion Emanuele Canonica also carded a 69 to move into a share of 11th place. He was joined at 7-under-par 212 by five other players.