Gallagher started the second day at Al Ain Golf Club a shot behind his compatriot, Cameron Adam of Royal Burgess, after an opening level-par 70 in the 54-hole event.
But, as Adam slipped to a share of 19th following a 75, Gallagher remained inside the top 10 as he added a 72 to keep himself in the hunt for the coveted title.
On a much tougher day in the desert, Gallagher was one-under early on before dropping three shots in four holes from the sixth.
He then reeled off nine straight pars coming home to sit in a share of tenth spot on two-over.
Adam was level-par for the day before dropping three shots in two holes just before the turn then bogeyed the the 15th and 16th.
On four-over, he sits a shot behind Aberdour’s Hamish Gorn, who signed for five birdies as he jumped into a share of 12th spot.
Welshman Toby Bishop fired his second straight round in the 60s - following up an opening 66 with a 69 - to hold on to a share of the lead.
He’s locked on five-under with Chen Ting-Yu after the Chinese Taipei youngster stormed into contention on the back of a best-of-the-day 65.
“I’m loving the week and have been hugely impressed with the golf so far,” said tournament host Faldo.
“I’ve tried to have a hands-on role with the course set up and felt the pins on the par-3s should be in slightly more testing spots.
“The whole basis for the Faldo Series is to enable juniors to learn vital skills and emulate the top level of golf.
“Being able to play away from tricky pins is an important discipline to master in the professional game and is one that’s tested greatly at major championships.”
Murrayfield’s Alison Muirhead carded a 71, beating her opening effort by four shots, to sit joint-30th on six-over, two shots less than Prestwick St Nicholas player Rachel Foster after she also signed for one-over second time around.
In the age-category battles, Gallagher sits second in the under-18 section while Adam is fifth in under-16s.