Lorena Ochoa shot her second straight round of 68 on the Magnolia Grove Crossings Course to finish three shots off the pace at 8-under-par 136 alongside Christina Kim. Juli Inkster, Cristie Kerr, Sophie Gustafson and Patricia Meunier-Lebouc share fifth place at 7-under-par 137.
Diaz was part of a four-way tie for the lead after round one and struggled out of the gate on Friday with a bogey at the par-3 second. She countered with a birdie at the very next hole but found trouble again with a bogey at the par-4 seventh.
At the par-3 eighth, Diaz hit her tee shot to 12 feet and sank the birdie putt to make the turn at 6 under.
The 29-year-old made her move on the back side, starting with a birdie at the par-4 10th after her second shot stopped within 9 feet of the hole. Diaz then converted a 10-foot putt for a birdie at the par-4 11th to make it two in a row.
Diaz parred her next four holes before a birdie at the par-5 16th lifted her into a tie with Daly-Donofrio at 9 under. Diaz then played her tee shot to 8 feet for a birdie at the par-3 17th to take the lead on her own.
Diaz added her to advantage at the closing hole and dropped her approach within 10 feet of the cup for another birdie.
'I hit some good shots on the back side,' said Diaz.
Daly-Donofrio, who got into this tournament thanks to her win at the 2001 Betsy King Classic after the criteria for entrance to this event was changed to include tournament winners through the last three years, had a strong front nine with three birdies.
She added back-to-back birdies from the 10th to get to 8 under and tallied a birdie at the 16th to take the lead momentarily. Daly-Donofrio stumbled to a bogey at the following hole but recovered at the last after her second shot stopped within 6 feet of the cup for a late birdie to complete a round of 66.
'It was just a great round of golf today,' said Daly-Donofrio. 'I hit it well. I didn't make too many mistakes. It was a banner day.'
Inkster, who was tied with Diaz, Kim and Grace Park after the opening round, grabbed a share of the lead at 9 under with a birdie at the 16th. The 44-year-old hit an unlucky shot at the par-3 17th, however, that rolled down a cart path before hitting a woman.
Inkster double bogeyed the hole en route to a round of 71.
Park struggled to a round of 73 on Friday to join Carin Koch, Rachel Teske, Karen Stupples, Hee-Won Han, Candie Kung and Janice Moodie at 5-under-par 139.