Nathan Lyon took eight wickets on a dramatic day two of the third Test to leave Australia needing 76 runs to beat India and keep the series alive.

Sixteen wickets fell on a captivating second day at Holkar Cricket Stadium, where the tourists collapsed to 197 all in reply to India's 109.

Ravichandran Ashwin (3-44) and Umesh Yadav (3-12) took Australia's last six wickets for only 11 runs to seemingly leave the game in the balance.

With sharp turn and variable bounce to contend with, Cheteshwar Pujara made 59 but India were skittled out for 163 in their second innings in Indore, Lyon claiming a magnificent 8-64 to leave Australia facing only a small run chase to make it 2-1.

Ashwin ended a stand of 40 by removing Peter Handscomb (19) after Australia resumed on 156-4 and Umesh trapped Cameron Green leg before in the next over.

Umesh cleaned up Mitchell Starc and Todd Murphy as the tourists folded after the drinks break, with Ashwin on the money as he struck Alex Carey in front, before bowling Lyon to end the innings in a flash.

Starting their second innings with a deficit of 88, India lost openers Shubman Gill and Rohit Sharma bowled and lbw respectively to the excellent Lyon.

Virat Kohli followed for only 13 after being struck on the pad in front of middle stump attempting to pull a Matthew Kuhnemann delivery that kept low and India were 78-4 when Lyon sent Ravindra Jadeja trudging off.

Shreyas Iyer made a brisk 25 before falling to Mitchell Starc and Lyon continued to apply the pressure, seeing the back of Srikar Bharat and Ashwin.

Pujara stood firm for a battling half-century but his knock was ended when Steve Smith produced a brilliant diving catch at leg slip for the relentless Lyon, who dismissed Umesh and Mohammed Siraj without scoring to clean up the India innings.

Ashwin into the top three

The 36-year-old Ashwin took his incredible tally of international wickets to 689 in his 269th match to become India's third-highest wicket-taker across all formats.

He surpassed the great Kapil Dev's haul of 687 in all formats for India, making the most of the conditions after Jadeja (4-78) had taken all four wickets for India on day one.

Only Anil Kumble (953) and Harbhajan Singh (707) have claimed more scalps for India in all formats combined.

Lyon Australia's spin king

It was Kuhnemann who starred for the tourists by claiming his maiden five-wicket haul in only his second Test on day one, but fellow spinner Lyon was the main man on Thursday.

He bowled with great guile and control, helping himself taking his 23rd haul in the longest format after picking up three wickets on day one.

Lyon now has more wickets against India across all formats than any other Australia bowler after moving past Brett Lee's total of 111, having claimed his second eight-wicket haul in India.