Lorena Ochoa posted a 66 to finish two shots off the pace at 10-under-par 206. Paula Marti was one shot further back at 9-under-par 207.
Minea Blomqvist of Finland fired an incredible, 10-under 62 on Saturday to move into a tie for seventh and in the process set a new record for lowest score in the history of women's major championships.
'Yesterday, I was just happy to make the cut to go on in the tournament,' said Blomqvist.
Blomqvist had two eagles in her historical round to go along with six birdies. She was joined by Laura Davies and Seol-An Jeon at 8-under-par 208.
Defending champion Annika Sorenstam will have considerable ground to make up on Sunday after a round of 70 left her at 7-under-par 209. The Swede finished alongside Laura Diaz, Beth Daniel, Natalie Gulbis, Jung Yeon Lee and Christina Kim in a tie for 10th.
Teske, an eight-time winner on the LPGA Tour, took advantage of the optimal scoring conditions and picked up her first birdie of the day at the par-5 second. She then hit her second shot to 12 feet for a birdie at the sixth and dropped her approach inside 10 feet for a birdie at the eighth.
At the par-5 ninth, Teske reached the green in two and drained a 15-foot putt for an eagle and a 31 on the front side.
The Australian was coasting at even-par on the back side until her second shot to the par-4 17th landed within 18 feet of the hole. Teske converted the birdie putt and closed with a birdie at the last to join Bowie in the lead.
'I'm very happy. I guess I have been close to putting a round like this together and not really finishing it off,' said Teske, whose best finish in a major is a tie for second at the Nabisco Championship in 2001. 'I guess all week I've been hitting the ball really solid and putting really well. Today I just played really solid and got off to a great start on the front nine and played solid coming in.'
Bowie vaulted out of the gate with an eagle at the par-5 first and a birdie at the par-5 second. After a bogey at the third, Bowie regained her momentum with a birdie at the fifth and grabbed a share of the lead at 9 under with a birdie at the par-4 sixth.
While Ochoa and Marti were making moves, Bowie kept plugging along and drained a 12-foot putt for a birdie at the ninth. She then birdied the 10th but gave that shot back with a bogey at the very next hole.
Bowie recovered with a birdie at the 13th and hit her tee shot to 20 feet at the par-3 15th. The 29-year-old ran home the birdie putt and made it two in a row at the par-4 16th after her second shot stopped 15 feet from the hole. That birdie moved her two clear of the field.
Bowie found trouble at the 18th, however, and could not get up and down to save par from off the green. Nevertheless, Bowie is in a perfect position to make her maiden LPGA Tour title a big one.
'I think it's very difficult, but I don't have very high expectations,' said Bowie. 'I try to stay very level because you can make a ton of birdies and you can make a ton of bogeys and you're playing about the same. But I don't get real excited when I get going well and I try not to get too down when I'm not.'
Kerr, a two-time winner this year, moved into contention with a round of 63 that matched her low score on the LPGA Tour.
The 26-year-old picked up a pair of birdies over her first five holes before she dropped her approach inside 8 feet at the seventh for her first of four consecutive birdies around the turn.
Kerr kept the birdie run going at the 12th and made it two in a row with a birdie at the 13th. Kerr then played her second shot to nine feet for a birdie at the last to finish within one of the leaders.
'I played really, really well today and I have a chance on Sunday,' said Kerr. 'I won't put pressure on myself to try and do it again tomorrow because anything can happen.'
Stupples, who held the lead after each of the first two rounds, battled to keep up with her charging competitors. She was on fire early with back-to-back birdies from the second, but a double bogey at the fourth hindered her progress.
The 31-year-old countered with a birdie at the sixth but dropped another shot with a bogey at the 11th. She then tallied two straight birdies starting at the 13th en route to a 70.
'Very happy to still be there after the up and down round that I had, and I think the fact that I had a three-shot lead after two rounds was a good little cushion for me today,' said Stupples. 'I felt like I finished up strong with birdies on 13 and 14 and a few par saves coming in. It gives me lots of confidence for tomorrow.'