Winner here in 2010 and runner-up in 2009, McDowell fired a superb six-under-par 66 in rain-softened conditions to take control of the elite 18-player event hosted by Tiger Woods.
The 33-year-old Northern Irishman made a fast start with three consecutive birdies on a receptive layout and finished with four more in the last nine holes to post a nine-under total of 135.
"A good day's work," said McDowell, who has not won anywhere since his 2010 World Challenge victory.
"The golf course is obviously very receptive ... so it's an opportunity to be very aggressive coming into these pins.
"And it's nice to come back to a golf course which has got some good memories for me. It's just been a golf course that's always fit my eye."
Jim Furyk, World Challenge winner in 2009, carded a 69 to sit three strokes off the pace with fellow Americans Bo Van Pelt (68) and Keegan Bradley (69).
Woods, the defending champion who has won the tournament a record five times, was a further shot back at five under after carding a five-birdie 69.
"Certainly I hit the ball a lot better than I did yesterday and made a couple more putts," said Woods, who moved into a four-way tie for the lead on the back nine before slipping back with a bogey at the 15th.
"I felt a lot better today with my swing overall. I just had to come out here and trust it and when I did I got into a nice little run there. I just need to do that all 36 holes on the weekend."
McDowell, however, took charge of the invitational event on a mainly overcast day with intermittent drizzle after starting the second round two strokes behind overnight leader Nick Watney.
He covered the front nine in two-under 34 with his only bogey coming at the par-four seventh, and picked up four more shots with a flawless display on the hillier homeward nine.
McDowell was well aware, though, that any of his closest challengers were capable of shooting a low score on a Sherwood layout softened by rain.
"I've certainly got my small little cushion going into the weekend, but all I can do is concentrate on my game," he said.
"I believe someone will go low this weekend at some point.
"Certainly seven, eight, nine under par is not out of the question on this golf course. There are a lot of birdie chances on this golf course.
"You really just gotta stay patient and wait for your opportunities to come along," said the Northern Irishman who won his first major title in the 2010 US Open at Pebble Beach.
McDowell would dearly love to end his 2012 campaign with a victory, having not triumphed anywhere since he beat Woods in a play-off to clinch the 2010 World Challenge.
"It would mean a lot to me to win this weekend, but I've got 36 holes of difficult golf against some great players to come," he said. "It's not like beating 156 guys, but there's 18 pretty good players here.
"This event has always got good memories for me. Like I say, I have a very relaxed approach to this week generally."
Watney, two strokes ahead of the field overnight after opening with a 67, bogeyed two of the last three holes for a 73 to lie five shots off the pace.
"Definitely a little sloppy today, and just a terrible way to finish," he said. "But we're only halfway through so we'll see if we can kind of make a charge at those guys in the morning."
World Challenge leaderboard after second round:
135 Graeme McDowell (Northern Ireland) 69 66
138 Bo Van Pelt 70 68
Jim Furyk 69 69
Keegan Bradley 69 69
139 Tiger Woods 70 69
140 Rickie Fowler 73 67
Nick Watney 67 73
141 Jason Dufner 73 68
142 Dustin Johnson 74 68
Matt Kuchar 73 69
143 Brandt Snedeker 75 68
Webb Simpson 70 73
144 Zach Johnson 74 70
Steve Stricker 73 71
Hunter Mahan 71 73
145 Ian Poulter (Britain) 73 72
Bubba Watson 71 74
146 Jason Day (Australia) 71 75
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