Welshman Dredge carded a flawless 66 on Saturday, including six birdies, to move two clear of the field on 12 under.
Having picked up two shots on his way out, Dredge added four birdies in six holes after the turn to seize the momentum.
By contrast, overnight leader Donaldson could only manage one under for the day despite starting his round with an eagle, and is now 10 under.
His three on the opening 538-yard par five proved to be a false dawn for Donaldson, who combined four birdies with three bogeys and undid his earlier good work at the eighth as a wayward approach shot resulted in a double.
Donaldson remains in position to secure a Ryder Cup berth, despite his disappointing day, but Dredge stands on the brink of his first European Tour win since September 2006.
The 41-year-old has hit form at the right time, finishing runner-up to Marc Warren at last week's Made In Denmark tournament, and he is delighted with his game.
"Last week was huge for me," he told the Tour's official website.
"I didn't win and I would have loved to have won but Marc played fantastic in the last round I thought and handled himself really well and totally outplayed me. I didn't play well enough.
"Still, I felt as though I played some good golf and I took a lot of confidence from it.
"I was hoping to bring it here with me this week and I have so far.
"It wasn't my best ball-striking round [on Saturday] but it was a good scoring round, that's for sure."
Denmark's Soren Kjeldsen drew level with Donaldson in a tie for second place after shooting four under.
Gregory Bourdy failed to take advantage of Donaldson's slip, also adding just one to his overnight score to sit fourth on nine under.