Garcia posted a 3-under 68, while Montgomerie double bogeyed the 17th en route to a 1-under 70. They are tied at 10-under-par 203.
Irishman Paul McGinley posted the round of the day as he fired a 6-under 65 to move into a share of third place. He was joined at 6-under-par 207 by Lee Westwood (67), Paul Broadhurst (67) and defending champion Ian Poulter (72)
Spaniard Jose Maria Olazabal shot 3-under 68 to take seventh place at minus-5 at Valderrama Golf Club.
U.S. Open champion Michael Campbell, who is the only player that can top Montgomerie for the top spot on the Order of Merit, also carded a 68. He shares eighth place with Nick O'Hern at 4-under-par 209. After his round, Campbell was awarded the status of Honorary Life Member by European Tour Executive Director, George OGrady.
Montgomerie was in charge most of the round, but a late double bogey cost him the outright lead. He birdied three of the first four holes for the second straight day to jump to 12 under.
Garcia played well, but was six shots behind on the back nine. The Spaniard two- putted for birdie on the fourth, then sank a 10-foot birdie try on five to get within three at minus-9.
The 25-year-old bogeyed the seventh and ninth to fall back to 7 under, four behind Montgomerie. The 42-year-old, though, missed a 7-foot par putt on the ninth to turn at minus-11.
Garcia two-putted for birdie on the par-5 11th, but stumbled to another bogey at 12 leaving him five back. Montgomerie had matched Garcia's birdie on 11 to stay four ahead.
Montgomerie's cushion moved to six when he birdied 13. Garcia began to chip away at the lead with a 6-foot birdie putt on the 15th and he kicked in a two-foot birdie putt on 16 to move within three.
Garcia knocked his second shot to the par-5 17th to the back edge of the green. He ended up three-putting for par, but gained two shots when the Scotsman struggled. Montgomerie layed up with his second, then mishit his third and it found the pond fronting the green.
Montgomerie took his drop and put his fifth shot on the green. He two-putted for double-bogey as his lead fell to one shot. Garcia's second shot to the last stopped within four feet of the cup and he drained that putt for birdie. Montgomerie then two-putted for par to share the lead with Garcia at minus-10.
'Monty was playing really well, so I didn't expect to be tied,' Garcia said. 'I knew that I was playing well and I knew that I could get it going a little bit.
'After a nice par save on 13, I was thinking maybe if I could make two or three birdies coming in and get somewhere around double digits (under-par) hopefully I wouldn't be too far back. He gave me a little help on 17, but I gave him help there too with my three-putt. It is the way it is and it's tough for sure.'
Montgomerie won this crown in 1993 and shared the title with Bernhard Langer in 2002 when darkness halted their playoff. He knows what he has to do, not only to win this title, but also the Order of Merit crown.
'I have a different agenda to 53 other guys and I am doing my job fine,' said Montgomerie, referring to the Order of Merit battle with Campbell. 'I am very proud of what I am doing. Scoring under-par was a very good effort. As I said, this isn't easy and it's proving it. There's nothing wrong with my game. It's just that Sergio had a great finish.'
Simon Khan is alone in 10th place at 3-under-par 210. Bradley Dredge and Niclas Fasth are one stroke further back at minus-2, while Robert Karlsson, Graeme McDowell and Henrik Stenson are the final players in red figures at 1-under-par 212.