Karlsson completed 54 holes at 20-under-par 196. His total of 196 established a new tournament record breaking the old mark of 198, which was set by Paul Broadhurst and Darren Clarke in 1998.
Lee Westwood, who led after round one, is alone in second place at 18-under-par 198 after a third-round 67. Charl Schwartzel and European Ryder Cup captain Ian Woosnam are two strokes further back at minus-16.
Emanuele Canonica (66), Gary Orr (70) and world No. 5 Retief Goosen (69) share fifth place at 15-under-par 201.
The third round was completed Saturday despite a weather delay. The inclement weather in the area never came over the course, but lightning kept players from returning to the course sooner than they did.
Karlsson opened with a birdie on the par-3 second and made it two in a row as he birdied the third. He also birdied No. 4 to move to 17 under at Gut Kaden Golf Club.
The Swede notched his third birdie in three days at the par-5 sixth. Karlsson made it two straight with a birdie on seven to move to 19 under.
Karlsson, who claimed his sixth tour win earlier this year at the Wales Open, parred his next nine holes. He then birdied the par-5 17th to get to 20 under before a par on the last.
'Every time you are up there you always learn from it,' Karlsson said. 'If you go on to win like I did in Wales you get a bit of a boost with the knowledge that you can handle it. But every week you are up there is a great experience and so I'm looking forward to it.'
For the week, Karlsson has played Nos. 2, 3, 6 and 17 at 13 under par with 11 birdies and an eagle.
Westwood carded his first birdie Saturday on the third, but gave that stroke back as he birdied No. 5. He atoned for that mistake with a birdie on the par-5 sixth.
The 33-year-old Englishman made the turn at 15 under after he birdied the ninth. Around the turn, he birdied 11 and 13 to get within two of Karlsson. Westwood birdied the 17th to trail by two after three rounds.
'I'd definitely rather be in the last group watching what is going on in front of me and around me,' Westwood admitted. 'Not that I pay that much attention to what is happening, I just try to play my own game, but it is nice to know exactly what is going on and what you have to do.'
Andres Romero, Daniel Vancsik and Sergio Garcia all carded 5-under 67s Saturday. They share eighth place at 14-under-par 202.
Soren Hansen, Garry Houston, Mikko Ilonen and Graeme McDowell are one stroke further back. Defending champion Niclas Fasth stands at 12-under-par 204 after a third-round, 2-under 70.