Australia's Wendy Doolan shot 68 for second place at 9-under 135. First-round leader Heather Daly-Donofrio followed up her opening 65 with a one-under 71 to tie for third with Mhairi McKay of Scotland, who had a 67 to get to minus-eight.
Dunn, three shots off the overnight lead, started on the back nine Friday and immediately birdied the 10th with a putt from 18 feet. She added three more birdies before making the turn, then rolled in another 18-footer at the fourth hole to climb to 9-under par.
Although she stumbled with a three-putt bogey at the par-5 5th, Dunn knocked irons close at the seventh and eighth for a pair of birdies that gave her the lead heading the weekend.
The 30-year-old Dunn, looking for her first LPGA victory since joining the tour in 1995, matched her career-best finish with a tie for second at New Albany two weeks ago and said she is feeling more at ease this season.
'I think that I am more comfortable out there and I am not trying to force things as much,' said Dunn, who tied for fifth at the Jamie Farr Classic in July. 'I'm just trying to let things happen and try to stay on an even keel while I am on the golf course.'
Dunn also gave credit to her new caddie, Rob Caliolo.
'I really like his approach and I think that it is starting to rub off on me,' she said. 'He is very mellow...he has been able to calm me down a lot and I am not as anxious on the course.'.
Doolan, who claimed her first career title at the rain-shortened Champions Classic in May, recorded five birdies and one bogey during her round Friday.
'I was playing well coming into this and have hit the ball quite well,' said Doolan. 'My ball striking was reasonably good all day today. All I can do is give myself opportunities and wait to see what happens.'
Daly-Donofrio, whose first-round 65 was a career best, negated two birdies with two bogeys to stay even through 13 holes Friday before sinking a 40-foot birdie putt at the par-5 16th. She is playing well despite lower back pain that almost forced her to withdraw Thursday.
'It did hamper my golf swing a bit because I was tight,' she said. 'I was not able to rotate through the ball...I think I just need to suck it up.'
Rachel Teske, who captured the 1998 Betsy King Classic for the first of her four LPGA victories, double-bogeyed the par-3 3rd hole en route to a 71 and a fifth-place tie with Audra Burks, who shot 68.
Meg Mallon (67), Becky Morgan (67), Angela Stanford (69) and Catriona Matthew (70) were together at six-under 138. 1999 winner Mi Hyun Kim (67) finished the first 36 holes alongside Alicia Dibos (67), Helen Alfredsson (70) and Pat Hurst (71) at minus-five.
Defending champion Redman was knotted in 20th place at three-under, while tournament founder and host Betsy King was tied for 50th place at one-over par.
The cut fell at two-over-par 146 and included 71 players.
Full-field scores from the Betsy King Classic