After England's bowlers rallied their team by dismissing Australia for 267 after tea, Mitchell Starc came within a whisker of a hat-trick and debutant quick Scott Boland grabbed another two wickets to leave England 31 for four, still trailing by 51 runs.
Starc had opener Zak Crawley (5) caught behind and Dawid Malan lbw for a duck in successive balls, and very nearly had Joe Root out on the third delivery which whistled by the England skipper's outside edge.
Home bowler Boland then triggered pandemonium in the Melbourne Cricket Ground terraces by having opener Haseeb Hameed caught behind for seven and nightwatchman Jack Leach bowled for a duck in the same over.
Root was 12 not out and Ben Stokes was on two, both left with an improbable rescue mission.
Holders Australia, who lead the five-match series 2-0 after wins in Brisbane and Adelaide, need only draw the match to retain the urn but appear set to head to Sydney for the fourth test with another one-sided victory.
England's latest batting collapse followed their paltry total of 185 in first innings on day one.
James Anderson and the England bowlers battled hard to bring their team back into the contest after Australia resumed on 66 for one in the morning.
But faced with some brilliant pace by the fired-up Australians, England's creaky top order failed to honour their team mates' hard work earlier in the day.
