In contrast to Friday, when the Australian was hampered by bike issues, he was quickly into his stride and within the opening six minutes had already gone faster than anyone else all weekend.
In the closing minutes his position came under threat from Pedrosa however, as the Spaniard - fastest in second practice - got down to a 1m39.369s.
Stoner's response was immediate, the reigning champion shaving a further two tenths off that benchmark to end the session on top.
In what was a good session for Honda riders, Yamaha's Ben Spies was the only other factory rider able to get close to the front pair - his best effort, set in the closing stages, just 0.017s shy of Pedrosa.
Stefan Bradl on the LCR satellite Honda ended the session in fourth, having run as high as second in an impressive display.
Tech 3 Yamaha's Andrea Dovizioso meanwhile prevented Honda from locking out four of the top five positions as he denied Gresini's Alvaro Bautista for fifth late on.
The Italian was the last rider to get within one second of Stoner. Jorge Lorenzo, the points leader heading into Indianapolis, was seventh fastest but more than 1.1s down on his Honda rivals.
Ducati's Valentino Rossi was not far behind in eighth, while the second Tech 3 Yamaha of Cal Crutchlow and Rossi's team-mate Nicky Hayden rounded out the top 10. Crutchlow suffered a fall at Turn 4 in the final two minutes, but was unharmed.
Of the CRT riders, there were impressive performances from Aspar's Aleix Espargaro and Avintia's Yonny Hernandez, who finished just over two seconds down on Stoner in 11th and 12th respectively.
1. Casey STONER AUS Repsol Honda Team Honda 1'39.182
2. Dani PEDROSA SPA Repsol Honda Team Honda 1'39.369
3. Ben SPIES USA Yamaha Factory Racing Yamaha 1'39.386
4. Stefan BRADL GER LCR Honda MotoGP Honda 1'39.681
5. Andrea DOVIZIOSO ITA Monster Yamaha Tech 3 Yamaha 1'40.018
6. Alvaro BAUTISTA SPA San Carlo Honda Gresini Honda 1'40.206
7. Jorge LORENZO SPA Yamaha Factory Racing Yamaha 1'40.339
8. Valentino ROSSI ITA Ducati Team Ducati 1'40.348
9. Cal CRUTCHLOW GBR Monster Yamaha Tech 3 Yamaha 1'40.402
10. Nicky HAYDEN USA Ducati Team Ducati 1'40.513