Colin Montgomerie, the first-round leader and defending champion, managed just a 1-under 71 in the second round. He stands alone in second place at 8- under-par 136.
Thomas Bjorn, a seven-time winner on the European Tour, fired a 6-under 66 to jump into a share of third place. He was joined at 6-under-par 138 by Danny Chia, Jamie Donaldson and Wen-Chong Liang.
Dougherty opened his round on the back nine and quickly picked up his first birdie at the par-5 11th. However, he stumbled to back-to-back bogies from the 15th to slip back to minus-three.
The 22-year-old caught fire on the front nine of the Masters Course at Laguna National Golf & Country Club. Dougherty dropped in a birdie at the first and came right back with a birdie at the par-5 second.
Dougherty was not done. He collected the fourth birdie of his round at the third to move to minus-six. The Liverpool native made it four straight birdies as he converted a birdie opportunity at the par-4 fourth.
Dougherty collected a birdie at the sixth to join Montgomerie in the lead at minus-eight. Dougherty vaulted two shots ahead of the Scotsman when he eagled the par-5 seventh. The eagle came courtesy of a tremendous 3-wood hot from 288 yards out that came to rest within one foot of the cup.
However, he faltered to a three-putt bogey at the ninth to close with a one-stroke cushion.
'I am playing well and I feel good in myself - I think rejuvenated is a good way to describe it,' said Dougherty. 'Golf is really good fun to play again and it wasn't last year. It is the changes I have made in my life away from golf that have allowed me to be more relaxed on the golf course.'
Montgomerie stumbled at the start of his round with a bogey at the par-5 second. He bounced back with consecutive birdies from the third to move to 8-under.
The Scotsman tripped to another bogey at the 10th as his lead fell to one shot. Montgomerie managed to get one stroke back with a birdie at the 15th. He parred the 16th and 17th, then missed a four-foot birdie putt at the last to remain one shot behind Dougherty.
Soren Hansen and Maarten Lafeber posted matching rounds of 2-under 70. They share seventh place at 5-under-par 139. Gregory Havret, Peter Hedblom, Jason Knutzon, Angelo Que and Raymond Russell are one stroke further back at minus-four.
The cut line fell at 2-over-par 146 with 90 players moving on to the weekend.