Hamilton lapped in one minute 34.811 seconds, more than a tenth of a second faster than Ferrari's early pace-setter, Brazilian Felipe Massa, who clocked 1:34.953.
Hamilton's Spanish team-mate Fernando Alonso, champion for the past two years with Renault, was third quickest in 1:35.311 while Poland's Robert Kubica was fourth for BMW Sauber in 1:35.385.
Ferrari's Australian Grand Prix winner Kimi Raikkonen, whose engine suffered a water leak in Melbourne last month, did just seven laps and was fifth fastest.
Hamilton, a stunning third on his Formula One debut in Australia, has been hailed as a future world champion and his performance on Saturday, albeit on the softer Bridgestone tyre, showed he has no fear of his more experienced rivals.
Ferrari were expected to dominate this weekend, with Alonso claiming that the Massa-Raikkonen combination looked unbeatable.
However, Hamilton and the Spaniard looked sharp in final practice and will be aiming to challenge the Ferraris for the top two places on the grid during official qualifying later on Saturday.
Massa went out in the closing minutes in an attempt to reclaim top spot from Hamilton. Although the Brazilian broke the 1:35 barrier, he failed to unseat the 22-year-old.
Williams driver Nico Rosberg was sixth fastest with a time of 1:35.770.
Super Aguri again upstaged the main Honda team, with Briton Anthony Davidson eighth and Japan's Takuma Sato 16th while Honda's Jenson Button was 17th and Brazilian team mate Rubens Barrichello 19th.
Malaysian Grand Prix free practice times on Saturday:
1. Lewis Hamilton (Britain) McLaren 1:34.811
2. Felipe Massa (Brazil) Ferrari 1:34.953
3. Fernando Alonso (Spain) McLaren 1:35.311
4. Robert Kubica (Poland) BMW Sauber 1:35.385
5. Kimi Raikkonen (Finland) Ferrari 1:35.498
6. Nico Rosberg (Germany) Williams 1:35.770
7. Nick Heidfeld (Germany) BMW Sauber 1:36.160
8. Anthony Davidson (Britain) Super Aguri 1:36.195
9. Ralf Schumacher (Germany) Toyota 1:36.245
10. Mark Webber (Australia) Red Bull 1:36.257
11. David Coulthard (Britain) Red Bull 1:36.273
12. Vitantonio Liuzzi (Italy) Toro Rosso 1:36.297
13. Giancarlo Fisichella (Italy) Renault 1:36.434
14. Alexander Wurz (Austria) Williams 1:36.473
15. Scott Speed (U.S.) Toro Rosso 1:36.501
16. Takuma Sato (Japan) Super Aguri 1:36.545
17. Jenson Button (Britain) Honda 1:36.658
18. Heikki Kovalainen (Finland) Renault 1:36.876
19. Rubens Barrichello (Brazil) Honda 1:36.972
20. Jarno Trulli (Italy) Toyota 1:37.473
21. Adrian Sutil (Germany) Spyker 1:38.018
22. Christijan Albers (Netherlands) Spyker 1:38.225
