Khan added a 66 to his opening 65 at the Oceanico Victoria Golf Course for a 13-under-par halfway total of 131.
First round leader James Kingston followed his 64 on Thursday with a 68 to share second place on 12 under alongside Welshman Rhys Davies (67) and Chile's Felipe Aguilar (66).
The halfway cut fell at five under par, meaning last week's Madrid Masters winner Lee Slattery missed out by a shot, while Ryder Cup captain Jose Maria Olazabal was two outside the mark.
Khan won the European Tour's flagship event, the BMW PGA Championship in 2010, but his best result so far this year is a fifth place in the French Open.
"It's been a great two days," Khan told reporters at the course.
"It's not been a brilliant year overall, but I always feel good coming around this course and enjoy playing in Portugal. I'm delighted with the two days.
"I think the thing is to enjoy the position I'm in and enjoy the pressure and carry that on into the weekend. We are only halfway through the tournament, so there are still lots of birdies to be made hopefully."
Meanwhile, Davies will certainly appreciate his late start on Saturday, with the Welsh rugby team taking on France in the World Cup semi-finals at 9am.
"I think we have a great chance," Davies said.
"We have a really tough team to play against, there's no doubt about it. I think the French are quite unpredictable.
"Thomas Levet was trying to tell me how dominant they were earlier, but I'm having none of it. I back my boys and I think they are great stuff.
"They have a really great team chemistry going it seems, and they are playing some really good rugby."
Sweden's Christian Nilsson and England's David Dixon are two off the lead after both carding rounds of 64, a score also matched by former amateur star Tom Lewis.
Lewis, who shot the lowest round ever by an amateur in the Open earlier this year, started on the 10th and bogeyed his first two holes, but after a par on the 12th he then birdied nine of the next 11.
He was joined on 10 under by Thomas Bjorn, the Dane seeking his fourth win of the season at the age of 40.
"I'm pretty happy," Bjorn told Sky Sports 2.
"I didn't putt very well today [Friday] which you have to do around here to get those low numbers, but I stuck with it all day and shot 69.
"I said yesterday [Thursday] you probably have to shoot four rounds in the 60s and find a low one in there so it's a good start and leaves me in a good position for the weekend."