Ko eventually signed for a four-under 68, which left her in a share of fifth, two shots back from clubhouse leader Suzann Pettersen who fired a six-under 66.
After beginning on the 10th tee, Ko picked up an early shot before she made bogey at the par-three 14th and made the turn at one under following a birdie at the 15th.
But she caught fire down the front nine of the Victoria Golf Club as birdies at the first, fourth, fifth and sixth holes had her get to as low as five under through 15.
The 16-year-old then dropped a shot at the par-three seventh and gave up another at the eighth as she slid down the leaderboard but birdied her ninth and final hole.
A short time ago there were a host of players still to complete their rounds.
The Australian Women's Open, which has a purse of $1.4 million, is co-sanctioned across the LPGA, Ladies European Tour and Australia Ladies Professional Golf tour.
This week's tournament is Ko's third of the year after she finished in a tie for seventh at the Bahamas Classic in the Caribbean last month and then finished second at the New Zealand Women's Open at Clearwater in Christchurch two weeks ago.
