The 45-year-old, who had opened with scores of 68-67, was still going well in his bid for a fifth European Tour win after covering the first 14 holes in two-under-par in the third round at Al Mouj Golf in Muscat.
However, a first bogey in 36 holes following a three-putt at the par-4 15th was followed by a 5-6 finish, costing him four shots over the closing stretch.
After tugging his tee shot at the 17th into a hazard, Gallacher hit a brilliant third to around four feet only to see his par putt dive left at the last second and lip out.
The Bathgate man then had to re-load after leaking his drive at the par-4 18th into the Gulf of Oman before producing another great iron shot to a similar distance.
Escaping with just a bogey would have been a massive boost, but he was unable to convert the putt, leaving him signing for a two-over 74 to sit joint-12th on seven-under.
Six players share the lead on 11-under, including 2018 Aberdeen Standard Investments Scottish Open champion Brandon Stone and Joost Luiten, winner of this event at the same venue two years ago.
Finnish pair Sami Valimaki and Mikko Korhonen are also in that logjam after rounds of 64 and 65 respectively, as are England's Calum Shinkwin and 18-year-old Dane Rasmus Hojgaard.
Connor Syme and Grant Forrest both carded 69s to sit in a tie for 27th on four-under, with Calum Hill, the other Scot to make the cut, lying just outside the top 50 on one-under after a 74.
On the Ladies European Tour, Michele Thomson is on course for a top-10 finish in the Women's New South Wales Open after continuing her good week's work at Dubbo Golf Club.
The Aberdonian sits joint-eighth heading into the final 18 holes, having followed opening rounds of 67 and 71 with a 73 for a five-under-par total in the second event of the new season.
After a 75, Gemma Dryburgh, who shared the first-round lead with Thomson, is down to joint-18th on one-under alongside Kelsey MacDonald, who backed up a second-day 69 with a 71.
In an event that saw all six Scottish starters make the cut, Kylie Henry (72) sits just outside the top 20 on level-par, followed by Laura Murray and Alison Muirhead on six and seven-over after 74 and 77 respectively.
Belgium's Manon De Roey is on the verge of her maiden victory after storming five shots clear of the field after backing up Friday's 64 with an equally-impressive 66 to sit on 15-under-par.