Grillo added a second-round 67 to his opening 66 to post an 11-under-par score of 133, leaving him four shots clear of American Bo Van Pelt and local hope Jason Scrivener.
Britain's Paul Casey suffered a disappointing second day to follow up his encouraging opening 67, slumping to a three-over-par 75 to sit nine shots off the lead.
South African Charl Schwartzel was the biggest casualty of the cut at the Perth International after hitting four over par for his second round.
The 2011 Masters champion had six bogeys in his round of 76, five of which were on the opening nine, before clawing back two birdies to end with a total of three-over 147 and miss the cut at Lake Karrinyup, north of Perth, by a shot.
Grillo, a European Tour rookie who is in desperate need of a good result to retain his European Tour card, fired two eagles on a spectacular front nine. The first came as he holed from a bunker on the par-5 third hole, then on the ninth he span a wedge back into the cup to be out in 32 on his way to a 67 that was the second-best round of the day.
“I think I hit it better yesterday than today but a couple eagles and a hole-out from the bunker helped a lot,” said, who is 112th on the money list with the top 115 retaining their playing privileges..
“Just go shot by shot, that's the main goal. You cannot think about the third hole when you're playing the second hole. It's the hardest thing in golf probably, but it's the best thing to do.
“I had a lot of people following today and I was fine with it. I kind of like the golf course, and it seems to suit my game.
“I just want to have a good week. My goal this week was having a good one to keep my card for next year. If I can win, awesome.”
World number 24 Van Pelt was happy to be in contention.
“It was a solid day,” he said. “I would say the biggest difference from today from yesterday, I think I played the par fives five under. I think I only missed three greens, so I was driving the ball in play, and was able to take advantage of the par fives.
“All in all, seven under, I'm very pleased. I haven't played a tournament in a few weeks, so I like the golf course a lot. I’m just excited about the opportunity. Last time I was in Australia, I didn't get to play the weekend, so nice to get to play the weekend."