Pace stood on 11-under 202 after 54 holes at Highland Meadows, level atop the leaderboard with US veteran Diaz, who fired a 71 in quest of her first LPGA victory since 2002.
South Korean Ryu So-Yeon and 20-year-old American Jaye Marie Green shared third on 203 with New Zealand’s Lydia Ko fifth on 204.
Pace, an eight-time winner on the Ladies European Tour, hopes a strong showing will help her jump to the US tour.
“I definitely want to be in America. Hopefully this week will help me get here full time,” Pace said.
“I’m very confident. I felt so relaxed today. It came naturally.”
Pace birdied the third and ninth holes but stumbled with bogeys at 11 and 12.
She responded with birdies at the par-4 13th and par-3 14th and another at the par-5 17th.
“I like the greens,” Pace said. “They are quite receptive to my shots. I’m confident about my iron play. I’m hitting it in there very well. Hitting really good.”
Diaz, who led when the day began, birdied the third hole but followed with a double bogey at the fourth.
On the par-4 ninth, Diaz drove the ball eight feet beyond the cup and made the eagle putt, but took a bogey at 12.
Green, with her teaching-pro father serving as caddie, fired a 63.