Ilonen added a 2-under 68 to his opening round course record of 64 to move to 10 under on the Fota Island Resort course.
The 34-year-old Finn birdied his opening hole but then stalled with eight straight pars ahead of an inward half that included four birdies.
''I wanted to at least get to 10-under par and I did that,'' Ilonen said. ''It wasn't as easy today and I didn't hit the ball that well but I putted well and it was good enough.''
Northern Ireland's Graeme McDowell (66), England's Robert Rock (66) and Frenchman Romain Wattel (65) share second place on 8 under while triple major winner Padraig Harrington (67) is tied for eighth on 6 under.
McDowell is looking to win the Irish Open for the first time and Rock has been runner-up twice before.
The loss of McIlroy over the final two rounds is a blow to event organizers. His second round 69 was a mix of a 10th hole eagle, six birdies and a double bogey at No. 4 for an overall 1-over 143. It is the second year in succession McIlroy has missed the cut in his national open.
McIlroy's double bogey came after his tee shot clipped a tree and ricocheted out of bounds and over the fence into the adjoining Fota Island Wildlife Park.
''I'll be back next year and try and do better,'' McIlroy said.