Her total score of 14-under 202 tied the 54-hole record for this event set by Annika Sorenstam in 1996 and matched by Michele Redman last year.
Redman, the defending champion, won last year's tournament at 14-under when it was played as only a three-day event.
'I'm glad I'm where I'm at,' said Dunn following her performance Saturday. 'It's exciting and I'm as comfortable as I've ever been. It feels great to be able to do that.'
Dunn, winless on the LPGA Tour since her rookie year of 1995, equaled her career-best finish when she tied for second at the Wendy's Championship for Children in Ohio earlier this month. Her only other runner-up showing came in the 1999 Hawaiian Ladies Open.
'I have hit the ball pretty solid,' she said of the form which has led to her success. 'I just have to keep doing what I have done the past few days, hitting fairways and greens.'
'I have been pretty confident, and there is no reason why they shouldn't keep going in.'
First-round leader Heather Daly-Donofrio shot a 68 to tie for second place at 12-under 204 with Scotland's Mhairi McKay. McKay also had a 68 to join Dunn as the only players to post three rounds in the 60s to this point.
Meg Mallon (67), Catriona Matthew (67) and Wendy Doolan (70) were three shots off the pace at minus-11.
Mallon, who won twice and amassed 16 top-10 finishes a year ago, has struggled somewhat this year with no victories and just five top-10s.
Full-field scores from the Betsy King Classic