Meg Mallon is the final player in red figures at 1-under-par 71. Michele Redman is one stroke further back at even-par 72, while Laura Davies, Se Ri Pak, Pat Hurst, Sophie Gustafson, and Karrie Webb share fifth place at 1-over-par 73.
Diaz stumbled out of the gate at Trump International Golf Club. She three-putted for bogey on the first hole, but battled back to birdie the third.
She moved to 1 under with a birdie on the sixth, then two-putted from 25 feet out for birdie at the ninth to climb to 2 under. However, she could not get up-and-down for par at the next and fell back to minus-1.
Diaz responded to her bogey quickly, dropping her 7-iron within three feet of the cup at the 11th to set up birdie. The two-time winner converted another three-footer for birdie at the 16th to finish at minus-3.
'I think it was our third time we both went out and tried to have a good time out there,' said Diaz of her pairing with good friend Heather Bowie. 'I managed to make a few birdies which I don't do very often on this golf course. I made a lot of good six-footers for par, which again, I have struggled with here. So it was just an all-around good day.'
Diaz, who has battled an ankle injury throughout the year, now plans on having surgery on the ankle in early December to relieve the pain and give her a chance to move ahead as a player.
'It has been a tough year for me. My ankle is definitely an issue,' said the 28-year-old Diaz. 'It's been a real mental challenge for me because I have seen my hard work pay off before. I can't work as hard now because I am in pain with my ankle, and yet I worked as hard as I could despite the pain and I wasn't seeing any of it pay off.'
Kane had bookend birdies on the front side at Nos. 1 and 9. She hit into some trees at the 12th and that led to her first bogey. She then came back with a two-putt birdie on No. 15, but stumbled to another bogey at the next.
Kane closed in style as she rolled home a 15-footer for birdie at the last to gain second place by herself.
'It is very difficult out there,' Kane said. 'I believe that the golf course, without the wind is tough. The finishing holes particularly on the backside are hard. And to factor in the wind, it makes it even that much more tougher.'
Annika Sorenstam, the defending champion, struggled horribly on the back nine. She stumbled to three consecutive bogeys on the back nine after playing the front side in 2 under. The Swede faltered farther with a double bogey on the 16th.
She closed with a birdie at the last for a round of 2-over-par 74. That score tied for her worst round of the year and placed her in a tie for 10th alongside Cristie Kerr, Patricia Meunier-Lebouc and Dorothy Delasin. Meunier-Lebouc is playing the event despite being more than five months pregnant.
Beth Daniel is one stroke further back at 3-over-par 75. Juli Inkster and Mi Hyun Kim head a group of eight players tied at plus-4.