The 46-year-old, who had shared top spot with England’s Holly Clyburn at the halfway stage, slipped to joint-sixth after a third-round 73 at The Grange.
On seven-under, Matthew sits just two shots off the lead, held by Jenny Shin (70) of South Korea, Japan’s Haru Nomura (70) and American Danielle Kang (67), so is still in contention to regain a title the North Berwick woman won 20 years ago.
On a packed leaderboard – there are 18 players within four shots – world No 1 and defending champion Lydia Ko (68) and five-time champion Karrie Webb (70) both sit a shot behind the three leaders in joint-fourth.
Also still in the hunt is Matthew’s fellow Scot, Kylie Walker, after the two-time LET winner carded a 71 to sit joint-13th on five under.
On a day when Clyburn dropped out of contention following a 78, Matthew had moved to 10-under for the tournament after going out in one-under then starting for home with a birdie at the par-5 tenth.
She then hit her first rocky patch of the week as shots were spilled at the 11th, 13th and 15th but she was consoled afterwards by the fact the leaders are still within touching distance.
Webb rolled in a long putt putt at the 18th hole after her chip had shot past the cup to stay alongside title favorite Ko on eight-under.
“That’s why she’s a legend,” said Ko, cheering, as she did a stint in the ABC television commentary box beside the green.
Earlier, Ko had birdied the first four holes to ignite her title defence. “It’s going to be fun,” said the 18-year-old of the final round.
Walker was three-under for her day with four to play before finishing bogey-birdie-bogey-bogey.
Nonetheless, like Matthew, she is giving a good account of herself in a world-class field after bouncing back from missed cuts in two events prior to this on her trip Down Under.