Phatlum, the 2008 and 2009 tournament winner shot 65 in warm and sunny conditions to end seven under before Arthur matched her total with a 67 at DLF Golf and Country Club in Gurgaon.
However, the star of the day was the defending champion Caroline Hedwall of Sweden, who blazed the course with a record breaking 10 under 62 for a 36-hole total of 138 to end one shot adrift of the joint leaders in outright third.
Laura Davies, who won the tournament in 2010 after a four-way playoff, shot 69 to end four under and well within striking distance in fourth.
Fellow English duo Florentyna Parker and Elizabeth Bennett share the fifth spot with Nontaya Srisawang of Thailand on three under par.
The 24-year-old Arthur from Queensland went out in level par 36 but made five birdies on the back nine on the 11th, 12th, 14th, 15th and 18th.
"I went out today with no expectations and I knew the course owed me a few shots as I got a bit unlucky yesterday," said Arthur, making her first visit to India.
"I walked off the ninth having three-putted and got quite angry so I said, "˜that's it: I'm going to go for everything,' because I should have been four or five under on the front nine. I had a few unlucky bounces and I thought, "˜if I keep going, I'm going to get some birdies.'"
United States based Phatlum began the day with a bogey on the 13th but picked up eight birdies at no. 14, 15, 17, 18, two, six, eight and nine.
"My drives today were much better than yesterday, when I only hit six fairways," said Phatlum, 22, who is aiming to win the event for the third time and finished second last year to Hedwall.
The 23-year-old Swede recorded her career best round of 62 with nine birdies, one bogey and an eagle, saying it was purely her putting that made the difference.
"It was just really solid and good: a good day on the golf course," she said. "I hit it a little bit closer but I also had a lot of birdie opportunities yesterday and putted terribly. Today I felt good about it and gave myself a lot of opportunities and holed a couple today too, even though I probably had five or six birdies that I could pretty much tap-in."
Hedwall started on number 10 and scored four under on the back nine. She holed a three feet putt on 10, before three-putting on 11 and made a five metre putt on 12. On 13, she made a four-feet putt and then on 14, a three-feet putt. Then she made an eight-feet putt on 17.
She played the front nine in six under par, sinking short birdie putts on the second and third, where she almost made a hole-in-one.
She eagled six, using a driver and hybrid before making a seven metre putt, then tapped-in for birdie on seven, before making her final birdie by sinking a four metre putt on the eighth hole.
The LET's ISPS Handa Order of Merit leader Carlota Ciganda from Spain played with Hedwall and Phatlum. She shot a four under 68 but said: "It was incredible. I felt like I was playing five over par next to Pornanong and Caroline."
Davies is now in the hunt just three shots off the lead and her eagle on 18 will have brought back fond memories.
"The top of the leader board is pretty strong with Caroline obviously, a 62, so close enough if good enough," Davies said.
England's Kiran Matharu (69) and first-round co-leader Stefania Croce of Italy (73) share eighth spot on two under par. Matharu, who lies in 111th place on the LET's ISPS Handa Order of Merit, is hoping for a top-five finish to be assured of her of retaining her playing rights for the 2013 LET season.
Meanwhile, six Indian players made the cut and will play the final round. The first-round co-leader Aditi Ashok led the way in a share of 10th place followed by Nalini Singh Siwach in a tie for 33rd. Gurbani Singh and Sharmila Nicollet were the next best placed in a tie for 43rd, followed by Vani Kapoor in equal 47th and Millie Saroha on the cut mark at +8 in a share of 62nd.
India's Rhea Nair may not have made the cut, yet walked away with an Omega watch after acing the par-3, 169 yard 16th. It was her fourth hole-in-one.
Scores at the end of round 2:
137 - Pornanong Phatlum (THA) 72 65, Bree Arthur (AUS) 70 67
138 - Caroline Hedwall (SWE) 76 62
140 - Laura Davies (ENG) 71 69
141 - Florentyna Parker (ENG) 70 71, Nontaya Srisawang (THA) 71 70, Elizabeth Bennett (ENG) 72 69
142 - Kiran Matharu (ENG) 73 69, Stefania Croce (ITA) 69 73
143 - Aditi Ashok (IND) 69 74, Carlota Ciganda (ESP) 75 68, Becky Morgan (WAL) 70 73
144 - Trish Johnson (ENG) 72 72, Veronica Zorzi (ITA) 74 70, Gwladys Nocera (FRA) 72 72, Thidapa Suwannapura (THA) 72 72
145 - Hae Ra Park (KOR) 74 71, Margherita Rigon (ITA) 73 72, Walailak Satarak (USA) 71 74, Celine Palomar (FRA) 71 74, Numa Gulyanamitta (THA) 74 71, Jaruporn Palakawong Na Ayutthaya (THA) 70 75, Tania Elosegui (ESP) 71 74, Stacey Keating (AUS) 70 75, Becky Brewerton (WAL) 69 76