Taiwan's Hsu maintained her overnight advantage with a fine round of 69 to finish the day on 10-under par. The world No. 69 has hit just one bogey in the first two days of action.
Sagstrom, from Sweden, jumped up the leaderboard with an excellent round of 67 at The Grange. She told the LPGA website it had been the best putting round of her career.
"I literally have never rolled a putter better, probably," she said. "My speed was phenomenal. So, I knew as soon as I was on the green that I had a birdie chance, which is an awesome feeling."
The chasing pack comprising three players is three shots behind at 7-under. U.S. player Nelly Korda put herself in contention with a magnificent 66, the joint best round of the day.
Home favourite Hannah Green kept up her good form with a round of 69 to stay close while Japan's Haru Noruma hit consecutive birdies on the final two holes for an impressive round of 67 to move level.
Overnight leader Jodi Ewart Shadoff from England dropped back to 6-under and sixth place after a round which included four bogeys.