Garcia eagled the par-5 No. 8 and holed seven other birdies with just one dropped shot to go 12 under for the tournament on 130, ahead of Swede Alexander Noren.
The Spaniard, who hasn't won on the European Tour in almost three years, provided a reminder of his natural ability - and familiarity with the course - with a fine bunker shot on No. 17 to save par.
"Because I'm home, I've hit that shot so many times. I hit it perfectly," he said.
Once ranked No. 2, Garcia dropped outside the top 75 after a loss of form following near-misses at the 2007 British Open at Carnoustie and 2008 PGA Championship at Oakland Hills.
The 31-year-old has improved this season and is back up to No. 49 with top 12 finishes in the last three majors.
"It's getting there," Garcia said. "It's not quite there yet - sometimes I have a little bit of a hard time hitting a draw, but when my little fade works out, I can keep it in play."
Noren also finished with a faultless round of 63 to back up his opening-day 69 and lead the chasing pack at 10-under 132, while Scotland's Gary Orr, England's Ross McGowan and Australia's Marcus Fraser are two shots further back.
"It didn't feel that good on the range," Noren said. "But I found my swing and holed a lot of putts. I played probably the best I've ever played on the front nine."
Defending champion Matteo Manassero of Italy is on 5-under 137 after a cautious round of four birdies and a bogey.
Last week's Portugal Masters winner Tom Lewis was due to tee off with Garcia and Manassero but was forced to pull out earlier in the day with a virus.
American two-time major winner John Daly looks set to miss the cut on 1-over 143 after his two rounds, while Anthony Kang should be involved over the weekend after finishing on 2-under 140.
Sergio Garcia at home at Castello Masters
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