Davies had six birdies and a bogey on the tough, par-73 Commonwealth layout where fewer than 25 golfers in the 150-woman field broke par Thursday.
There was a six-way tie for second: Yang Soo-jin, Giulia Sergas, Jenni Kuosa, Felicity Johnson, Rebecca Flood and amateur Alison Whitaker all had 70s.
Alexis Thompson, the 15-year-old American amateur who played in the U.S. Open at the age of 12, shot 71 and was in a group tied for eighth.
Karrie Webb, who won last week's Australian Ladies Masters and is a four-time Open champion, shot 73. Playing the tougher back nine first, Webb had three bogeys before making the turn and then made four birdies and another bogey to remain even on the day.
Former amateur star Amanda Blumenherst, who led the Australian Masters after the first two rounds, shot 77 while fellow American Christina Kim had a 78.
Davies bailed herself out by some strong putting.
"Luckily I putted really well today," Davies said. "Today we had two 8- or 9-footers for par and they both went right in the middle of the hole. That's the sort of thing that really keeps you going. Then on nine, hoping to two-putt and you roll a 35-footer in so that was a real bonus."
Davies has won the Australian Open twice — last year at Metropolitan and in 2004 at Concord in New South Wales.