The 19-year-old Smith was at 5-under after two rounds at the Kingston Heath course.
Webb, who has won the national title three times, shot back-to-back 72s to share third place at 2-under 144 with fellow Australian Lindsey Wright and Park Hee-young of South Korea.
England's Kirsty S. Taylor started with four birdies in her first five holes and finished with a 68, the lowest second round score, to move into sixth place with American Carrie Wood.
Overnight leader Ursula Wikstrom of Finland followed her opening round of 70 with an 82 to slip to 6-over. The cut was made at 8-over.
Smith said her father Wayne Smith, a former professional who won three titles on the Japan tour, was a big help as caddie.
'We have a lot of fun out there. He knows all the Australian courses, especially this one,' said Smith, who is aiming to be the first amateur to win the Australian Open. 'Of course, its always in the back of your head.
'I know I can match it with the pros. I showed today that I can and I am looking forward to the weekend.'
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