Smalley produced a spirited back-nine fightback to post a gritty two-under-par 68 and surge two strokes clear of a pack of five players in equal second place at Aronimink Golf Club.
Spanish superstar Jon Rahm had snared a share of the clubhouse lead as the cream of world golf rose on an action-packed moving day outside of Philadelphia.
After two chilly days bit hard, Saturday gave way to bright sunshine and Rahm and Rory McIlroy were among the heavyweights to take advantage.
Chasing the third leg of the career grand slam, having already won the Masters and US Open, Rahm fired a three-under 67 to move to four under for the championship.
He had a golden chance to claim the lead outright only to register a rueful three-putt bogey at the last hole.
The slip-up allowed Smalley to seize the outright lead at six under.
Winless on the PGA Tour, the 29-year-old halfway co-leader leaked three shots in his first four holes before resetting and conjuring six birdies to steady the ship.
Smalley has never even held a 54-hole lead before in his 140 starts on tour and is playing just his fifth major.
"Anybody who wants to play golf for a living dreams of winning on the PGA Tour when they're younger," he said.
"I recognise that I have an opportunity to do that. I recognise that it's on a stage that's a little bit larger than most other tour events.
"I'm trying to downplay that as much as I possibly can just to make it seem like any other golf tournament, because essentially that's all it really is."
Rahm is two back on a truly cosmopolitan leaderboard alongside England's Aaron Rai (67), Swede Ludvig Aberg (68) and Germany's Matti Schmid and Canadian Nick Taylor, who both matched the low round of the week with sizzling five-under 65s.
McIlroy is three strokes behind at three under after continuing his own stirring fightback.
A four-over 74 start had left the back-to-back Masters champion in a tie for 105th after the opening round.
Then, after starting his third round five shots back, McIlroy reeled in the halfway frontrunners with six birdies in his first 13 holes.
Two-time major winner and 2024 PGA champ Xander Schauffele is also at three under after matching McIlroy's 66, as is Patrick Reed (67) and fellow American Maverick McNealy (71).
A PGA Championship-record 21 players are within four shots of the lead entering the final round, including Australian pair Cameron Smith (68) and Min Woo Lee (71).
Smith and Lee are both are at two under in a 12-player logjam including Justin Rose (65) and Hideki Matsuyama (71).
World No.1 and defending champion Scottie Scheffler (71) and triple PGA Championship winner Brooks Koepka (68) are among those at one under and only four shots off the pace.
"I've never seen a leaderboard like this, this bunched up. Going into tomorrow, it's quite literally anybody's tournament," Scheffler said.
"There's a lot of guys that have a chance. Just somebody is going to have a great round, and I'm going to make sure to do my best to give myself my best shot at being the one who has a great round."
