Now 36 and no longer a fulltime rider, McCauley shaded Yates and title contenders such as defending champion Hayden Roulston, Heath Blackgrove, Glen Chadwick and Canadian Dominique Rollin on the longest stage of the tour from Invercargill to Gore over 165km.
Cycle Surgery's McCauley had enough in the tank to pip Southland Times Trek's Paul Odlin by 4/1000ths of a second at the finish even after continually egging on a breakaway of 13 riders while Odlin sat at the back and did no work for about 160km.
With 20km to go, Odlin, McCauley and Kia Motors' Australian rider Will Dickeson broke from the bunch to set up a three-way battle for the podium placings.
Odlin surged 100m from the finish line but McCauley got on his wheel to draw level with 50m left.
Both riders went elbow to elbow but McCauley had the strength to bump past a fading Odlin and win by the barest of margins.
McCauley clocked three hours 49 minutes 39 seconds with Odlin at the same time but given second after judges examined video footage of the finish. Dickeson was another 4sec adrift.
With the main bunch containing chief tour contenders such as Yates, Chadwick, Roulston, Colourplus' Heath Blackgrove and Rollin rolling in just over 2-1/2min behind, the top 10 in the general classification were rewritten.
McCauley, who started the day 2min 1sec behind Yates, now leads the tour with an overall time of 6hr 7min 35sec, with teammate Eric Drower second at 13sec and Odlin third at 27sec.
Yates was to start today's fourth stage in sixth at 54sec, with Blackgrove seventh at 1min 17sec, Chadwick ninth at 1min 25sec, Roulston 14th at 1min 39sec and Rollin 19th at 1min 51sec.
McCauley, who won the race in 1996 and 2005, sniffed his opportunity less than 5km from the start, leading a group of nine other riders in a chase to bridge the 40sec gap to Rollin and Ascot Park's Clinton Avery, who jumped from the start.
He then marshalled the breakaway to build a gap of more than 4min over the main bunch at some points.
"I don't have climbing legs anymore, I'm getting too old for GC but I came here to win what I could and to get a stage win for the team is awesome," said McCauley, whose family lives in Gore.
Yates said his team had worked hard to cut the gap to the leaders in a bid to keep him in the yellow jersey.
"Unfortunately the group that got away was a big one and there was a little bit of negative racing among the main bunch out there," Yates said.
"Everyone (in GC running) was watching each other. Delmaine and Raboplus participated in the chase (with us) but not everyone had the same idea.
"I guess everyone wants to have fresh legs for the next four days."
With a strong cold front expected overnight and snow predicted to fall down to 200m, today's two stages will test the peloton's endurance to the limit.
Team manager Greg Hume said Subway's plans went awry yesterday when Joe Cooper was unable to rejoin the breakaway after a puncture.
"We had to do the bulk of the chasing today but we are still in contention even if it did not go to plan today."
Today's stage four is 88.4km from Invercargill to Tuatapere followed by stage five from Tuatapere to Winton over 101.7km.
