The Spanish Yamaha racer clocked a best lap of one minute 27.899 seconds, 0.221sec ahead of fellow Spaniard Marquez.
It is Lorenzo's 28th career MotoGP pole and his third of the season, giving him an edge in Sunday's third-last race of the season as he bids to prevent Marquez from clinching the world title in Australia.
In a development late on Saturday, Race Direction said as Bridgestone were unable to guarantee the safety of their rear slick tyres beyond 14 laps on the track's new asphalt surface the distance of Sunday's MotoGP would be reduced to 26 laps.
Officials said riders would be required to enter the pits and change to their second machine with fresh tyres at least once during the race.
Australia's two-time world champion Casey Stoner had previously held the Phillip Island lap record of 1:28.665, set in 2008 among his six consecutive Australian MotoGP victories.
Marquez, who leads Lorenzo by 43 points and can wrap up the world title in his rookie season in Sunday's Australian race, had twice gone under Stoner's lap record before he was trumped late in the session by Lorenzo.
"Obviously Casey was unbelievably fast around here, so without him here this year it's easier for everyone in theory, so we will try our best to be competitive all the weekend," Lorenzo said.
"Today we made it and we improved by seven-tenths (of a second) from our first try, so it's impressive how fast we can go with new tyres.
"We have some problems with the tyre because the new asphalt makes a lot of graining."
Lorenzo had some anxious moments when he was hit by a seagull as he was hurtling around the sweeping island circuit.
?I had an impact with a bird on the first few laps on the bike, luckily we could take it off and I could make a second attempt without a passenger, maybe because of this I went a little bit faster and was able to make pole position," he said.
Marquez, who is bidding to become the first rookie to clinch the premier class championship since American Kenny Roberts in 1978, said he expected a torrid battle with Lorenzo in Sunday's MotoGP.
"The target today was trying to finish on the front row of the grid," he said.
"Tomorrow the race will be difficult, everybody will be struggling a little bit with the tyres.
"After the issues with tyres the race will now be a flag-to-flag, which for me is the first time so it will be interesting -- even if I would have preferred a shorter race but this is the decision from Race Direction."
Seven-time premier class world champion Valentino Rossi was third fastest, 0.748sec down on Lorenzo and will start on the front row along with Spain's Alvaro Bautista on a Gresini Honda.
"To be able to push 100 percent on the soft front tyre is a fantastic feeling," Rossi said. "I?m so happy with this position, it's the second first row in a row.
"It looks like in the last races we have found a better solution for qualifying because at the beginning of the season I struggled a lot."
Marquez's Repsol Honda teammate Dani Pedrosa was fifth quickest and will start the race inside the second row.
