Lee fired the low round of the morning, a five-under-par 65, to charge to within three shots of American clubhouse leader Wyndham Clark.
Bidding to join his dual major-winning sister Minjee as a US Open champion, Lee’s dazzling round included an extraordinary 407-yard drive on the 16th hole.
That set up the 24-year-old’s fifth birdie of the day.
Then the Perth prodigy wowed fans with his iron play, knocking an approach at the last to within four feet for a sixth birdie to ice his brilliant round and climb to six under.
Smith is two shots further back at four under after backing up his first-round 69 with a 67 on Friday.
After teeing off on the 10th, Smith dropped a shot early on No.11 before collecting birdies on 12, 13 and 15 to get his round back on track.
The world No.9 picked up two more shots on his inward nine to be well-placed for a weekend challenge.
Lee and Smith entered the year’s third major after career-best results at last month’s PGA Championship in New York and have carried the momentum to the Los Angeles Country Club.
Minjee Lee is the reigning Women’s US Open champion and will defend her title next month at Pebble Beach.
Now her baby brother has the chance to complete the first sibling title double in golf history.
Fellow Australian Cam Davis tied for fourth at the PGA Championship but will miss the cut in LA after slumping to 11 over with rounds of 72-79.
Davis ended his second round equal last in the 156-man field.
Lucas Herbert, Adam Scott and Jason Day all had afternoon tee times.
Herbert was even par and Scott and Day both three over and battling to make the cut.
Clark grabbed the clubhouse lead at nine under with a second-round 67, after opening with a 64 on Thursday.
Former champion and four-time major winner Rory McIlroy is just one stroke behind after a three-under 67.