Hale Irwin, who shared the lead on Saturday until a bogey at 17, shot a 2-under 70 and is alone in fifth place at 12-under-par 204, followed by defending champion Jim Thorpe, who posted a 4-under 68 to finish at minus-11.
Watson held a four-shot lead heading into the third round but quickly lost his huge advantage. He dropped shots at the second and third but rebounded with a pair of birdies at five and six.
Watson was still on top of the leaderboard but knocked his birdie putt eight feet past the hole at the 12th. He missed the comeback par putt and missed the green short at 13 when he drove into a bunker. Watson bogeyed that hole as well and found himself tied for the lead with Irwin and Kite.
Kite dropped a shot at 14 and Irwin battled back spasms en route to a bogey at No. 17. Watson two-putted for birdie at the 15th to reach 13-under par and Kite closed with birdies at 15 and 17 to also get to minus-13.
Hatalsky birdied 15-17 to sneak up the leaderboard with a 5-under 67.
But it was Ahern who moved to the top of the leaderboard with steady play on the front nine at Reserve Vineyards and Golf Club. He made only one birdie through his first 14 holes but took advantage of the three closing par-5s in the final four holes.
Ahern birdied No. 15 to get within one of the lead and two-putted for birdie from 25 feet at the 16th to match Watson at 13-under par. The par-4 17th hole played the most difficult of the closing holes but Ahern's length helped. He had a 9-iron into the green and stopped the ball four feet from the hole where he drained the birdie putt.
'I haven't had a chance to really look at the leaderboard, but boy, there's a lot of guys there right behind me,' said Ahern, who won this year's Music City Championship. 'I played a really solid round of golf today. Tee to green, I was really right on.'
Ahern has never won a major championship on the Champions Tour. Watson has two, including this year's Senior British Open, Irwin owns seven, Kite and Thorpe one each, so the pressure will be on Ahern come Sunday afternoon.
'I've never led a major, so kind of uncharted waters for me,' said Ahern. 'My record in the majors hasn't been that good but I feel comfortable on this golf course. If I can spruce up a little bit with that putter, I feel confident.'
Watson matched his career low round of 62 on Friday but came back with a 1- over 73 on Saturday. Still, Watson is in the hunt for major No. 2 of 2003 after he has set a new record by playing in nine total major championships in 2003 between the elder circuit and the PGA Tour.
'I guess it was the law of averages,' said Watson. 'Yesterday was a superb day. Today was a very ugly day, as far as my standards. People can come from pretty far back in this tournament. It's going to be a shootout tomorrow.'
Kite, who shot a 67 on Saturday, is in the best spot to claim his first victory on the Champions Tour in 2003. He tied for second at the Senior Players Championship but is in great shape for his second Tradition title in four years.
'The golf course is relatively easy,' said Kite. 'Somebody's going to have come out and shoot a really good score tomorrow.'
Allen Doyle and Gil Morgan posted matching rounds of 5-under 67 and share seventh place with Graham Marsh, who shot a 69 on Saturday. The trio stands at 10-under-par 206.
Jack Nicklaus tallied five birdies on the back nine, including four in a row from the 13th to card a 4-under-par 68. He is tied for 10th place with Vicente Fernandez at minus-9 but was more concerned about missing a makeable birdie try at the closing hole.
'I didn't make my birdie at 18 which could have gotten one shot closer coming in,' said Nicklaus, a four-time Tradition winner.