Australia 318 and 187 for 6 (Marsh 96, Smith 50, Hamza 3-27, Afridi 3-58)) lead Pakistan 264 (Shafique 62, Masood 54, Cummins 5-48, Lyon 4-73) by 241 runs
In-form Mitchell Marsh and a battling Steven Smith struck half-centuries under pressure to deflate Pakistan as Australia regained control of the Boxing Day Test after recovering from a calamitous top-order collapse.
In cloudy conditions and on a tricky MCG surface, Australia had crashed to 16 for 4 in their second innings with a lead of just 70 runs. But Marsh and Smith combined for a 153-run partnership in the highest fifth-wicket stand in Test history from a total of 20 for 4 or lower.
In a late twist, they both fell in the final session with Smith dismissed for 50 on what proved to be the last ball of day three when he gloved a brutal delivery from spearhead Shaheen Shah Afridi to gully.
Afridi's strike gave Pakistan hope, but Australia still had the edge with a valuable lead of 241 runs with four wickets in hand.
Pakistan, however, could have been in a far better position. The pivotal moment came early in the second session when Marsh on 20 was badly dropped by Abdullah Shafique at first slip off quick Aamer Jamal when Australia were 46 for 4.
Reminiscent of his blunder early on day one when he spilt Warner, Shafique could not hold onto a thick edge from Marsh's attempted drive. The ball almost rebounded to Salman Agha, who appeared to be caught off guard. Shafique was eventually removed from the slips as Pakistan's confidence nosedived.
Ghosts of the past appeared to be rearing for Pakistan as seemingly distracted captain Shan Masood misfielded at mid-off on the next delivery to gift Marsh a boundary.
Marsh made a dejected Pakistan pay with 96 off 130 balls to continue his rich form since being recalled to the team in Headingley during the Ashes. But he missed out on his fourth Test century when he edged a brilliant delivery from left-arm quick Mir Hamza that was superbly taken low at slip by Salman.
His father Geoff and brother Shaun, who both played Test cricket for Australia, were left in disbelief in the terraces.
In contrast to an aggressive Marsh, Smith batted watchfully and intent on playing a support role. He did not hit a boundary until the 101st delivery he faced with Smith remaining extremely cautious of a surface that somewhat settled as the day wore on but proved unpredictable.
Smith only scored one run in the final hour before he was left in shock after his 176-ball knock ended in the final over.
Pakistan still faced a daunting task of avoiding a 16th straight defeat in Australia and will feel frustrated having stormed back into the contest after inspired new ball bowling from Hamza and Afridi.
Leading by 54 runs on the first innings, Australia slumped to 6 for 2 after Afridi shrugged off a sluggish series by removing opener Usman Khawaja and Marnus Labuschagne on the stroke of lunch.
The resumption of the second session was briefly delayed after third umpire Richard Illingworth was stuck in a lift. But Australia were soon in disarray when opener David Warner bottom edged an attempted pull shot off Hamza onto his stumps.
Warner trudged off the ground to a standing ovation from the 39,000 crowd in his last Test innings at the MCG before retiring at the end of the series.
Hamza was perhaps fortunate to have dismissed Warner, but he exhibited sheer skill when he clean bowled Travis Head for a golden duck with a gem of a delivery that swung back in and crashed the stumps.
It was a calamity Australia have rarely experienced on home soil. Only during their dire performance in 2016 against South Africa in Hobart, when they crashed to 8 for 4 on the opening morning, had Australia been in a worse position after the fall of the fourth wicket in a home Test over the last 70 years.
Marsh scrambled to the crease before leaving alone a wide delivery to negate Hamza's bid for a hat-trick. He had to overcome immaculate line and lengths from Afridi and Hamza, who targeted his pads. He finally got off the mark on his 14th delivery and scored briskly despite some anxious moments.
Play on day three had been delayed by 45 minutes due to drizzle underlining Melbourne's fickle weather with no rain having been forecast.
Resuming at 194 for 6, trailing by 124 runs, Pakistan's lower-order kept them in the contest before they were ultimately dismissed for 264. Shafique and Masood made half-centuries but a collapse of 5 for 64 late on day two proved costly.
Wicketkeeper Mohammad Rizwan made 42 in his return to the team, while Jamal scored an unbeaten 33 to show promise of being a genuine allrounder as he starts his Test cricket impressively.
But Pakistan had no answer for Australia captain Pat Cummins, who finished with 5 for 48 from 20 overs to complete his 10th five-wicket haul in his Test career.
Offspinner Nathan Lyon finished with 4 for 73 off 18.5 overs in his first match since claiming his 500th wicket in the series-opener.
