Marsh leads fightback for Australia after Pakistan blitz
At the break, they were 107-4 with Marsh on 57 and Smith not out 26 in a crucial 91-run partnership after a horror start on a pitch still offering plenty for the bowlers.
After dismissing Pakistan for 264 in reply to their first innings 318, with Pat Cummins taking 5-48 and Nathan Lyon 4-73, Australia needed to negotiate a tricky 15 minutes of the morning session.
But anchorman Usman Khawaja was out for a duck second ball, caught behind by Mohammad Rizwan off bowling spearhead Shaheen Shah Afridi.
The same combination struck again when Marnus Labuschagne edged down the legside to be out for five, leaving them on 6-2 at lunch.
When they returned, David Warner let rip with a drive to the boundary off Afridi, but he didn't last, dragging a Mir Hamza ball onto his stumps on six.
He received a standing ovation as he walked off for the last time as a batsman at the Melbourne Cricket Ground, with the third Test in Sydney set to be the last of his long career.
Things only got worse for the hosts when Travis Head was bowled by Hamza the next delivery with an inswinging yorker to leave Australia in disarray at 16-4.
But Marsh successfully saw off the hat-trick ball and along with Smith dug in to take the sting out of the attack.
When Aamer Jamal came on, Marsh slammed three boundaries in four balls to further relieve the pressure.
He had a massive let off on 20 when dropped in the slips by Abdullah Shafique, but quickly got back in his stride, collecting eight boundaries in a seventh Test half-century.
Pakistan resumed on 194-6 after an electric spell from Cummins in the final session on Wednesday saw a collapse from 124-1, with the Australian skipper in the thick of the action again Thursday.
Rizwan, picked ahead of Sarfaraz Ahmed for his batting prowess, made a confident start, adding 13 to his overnight 29.
But he was no match for a canny Cummins, who tempted him into a drive that flew straight to Warner who had just been moved to cover from slip.
It snapped a 45-run partnership with Jamal, who started to play shots with new partner Afridi as they chipped away at the lead.
An enterprising Afridi crunched four boundaries before he was undone by Lyon's spin, trapped lbw for 21.
Jamal was in good touch, finding the ropes three times in six balls at one point in his 33 not out.
Cummins grabbed his fifth wicket by bowling Hasan Ali for two before Lyon had Hamza stumped for the same score.