England blew their chance of posting a big first innings total when they lost their last six wickets for just 46 runs in the morning to be all out for 291.
However, the tourists gave themselves a glimmer of hope of salvaging something from a disastrous tour by picking up a quartet of wickets in the afternoon to restrict Australia to 188 for four by stumps.
Fast bowler Steve Harmison dismissed Matthew Hayden and Michael Clarke while seamer James Anderson got rid of Justin Langer then ran out Ricky Ponting with a brilliant piece of fielding.
Mike Hussey and Andrew Symonds then returned after a one-hour rain delay to tip the balance back Australia's way.
Hussey, who has made at least 50 in all but one of his previous innings in the series, was unbeaten on 37 at the close with fourth Test centurion Symonds not out 22 and looking in an ominous mood.
Hayden departed for 33 when he mistimed a cut from Harmison to Paul Collingwood at second slip then Anderson threw down the stumps from mid-on to get rid of Ponting for 45 when the Australian skipper was caught short of his ground.
Clarke went for 11 when he flashed at a short ball from Harmison and was caught by wicketkeeper Chris Read in front of another full-house at the Sydney Cricket Ground.
Read also took a sharp legside catch off Anderson's bowling to send Langer on his way for 26 in the left-hander's final Test before retirement.
1,000TH Wicket: Glenn McGrath and Shane Warne, who are also quitting the Test arena, fared better in their last appearances with McGrath bagging three wickets and Warne claiming his 1,000th international victim.
Australia's three paceman McGrath, Brett Lee and Stuart Clark shared the first nine wickets to fall before Warne trapped Monty Panesar lbw for a duck to join Sri Lanka's Muttiah Muralitharan as the only players to claim 1,000 one-day international and Test wickets.
England had resumed on 234-4 and were looking to build on their encouraging performance from day one, only to see their lower-order crumble after the Australian seamers took the second new ball.
The only Englishman to show any sustained resistance was skipper Andrew Flintoff, who made an aggressive 89 in easily his best performance of the tour.
Flintoff started the day on 42 and quickly brought up his second half-century of the series with a three off McGrath.
He belted 11 fours and a six before throwing his wicket away in pursuit of quick runs as he chased his first century since the last Ashes series in 2005.
McGrath triggered England's collapse when he dismissed Collingwood for 27, caught by wicketkeeper Adam Gilchrist, after collecting two wickets on day one.
Lee got rid off Read and then Sajid Mahmood for a golden duck in successive balls before Clark trapped Harmison lbw and grabbed the vital wicket of Flintoff when he danced down the pitch and top-edged another catch to Gilchrist.
Langer struck four boundaries in his quick-fire 26 before flicking a legside catch off Anderson to Read while Hayden nicked one to Collingwood at second slip after mistiming an attempted cut off Harmison following a 66-run partnership with Ponting.
The Australian skipper brought about his own downfall with a suicidal run with the total on 100 while Hayden and Clarke were both guilty of playing rash shots outside
England 291 (Andrew Flintoff 89, Ian Bell 71, Pietersen 41, Collingwood 27; McGrath 3 for 67, Clark 3 for 62, Brett Lee 3 for 75) Vs Australia 188 for 4 (Ponting 45, Hussey 37 n o, Hayden 33, Langer 26; Harmison 2 for 34, Anderson 1 for 55)