Paddison carded a five-under par 67 in superb cloudless conditions on the Castello di Tolcinasco course to end the round just three shots from the lead.
It left Paddison, 27, from Wellington, trailing the leading duo of England's Ross McGowan and Paraguay's Marco Ruiz who head the field on eight-under par.
McGowan, who birdied six of his outward nine holes, won twice last year on the secondary Challenge Tour whilst Ruiz came to fame when he flirted with the lead at one stage of the 2003 Britich Open at Royal St. Georges.
Three players -- England's Mark Foster, Scoland's Marc Warren and South African Hennie Otto are next best on seven under par.
Paddison is in a 10-way tie for 14th spot that includes American former British Open champion John Daly.
Paddison's round also included five birdies and his 67 is the second occasion in recent weeks the former New Zealand Amateur strokeplay champion has shot five-under par after handing in a similar score on day three of last week's Spanish Open in Seville.
"It was a pretty steady round of golf and I really got it going when I birdied three-in-a-row from my fourth hole.
"But to eagle the last was great and it certainly makes dinner taste that much nicer tonight," he said.
"I played pretty well in Spain last week and managed to fight back from a first round 73 and finish 18th.
"That was my third top-20 finish this year so hopefully now I can go low again tomorrow."
Steve Alker, the only other New Zealander in the field, carded a disappointing 75 that included just one birdie but four bogeys.
