Engel and fellow Mercedes driver Broc Feeney staged a thrilling battle in the second part of the Shootout, trading fastest times as they flirted with the 2m00s mark.
It was Triple Eight driver Feeney that set the first representative time with a 2m01.671s.
Engel then responded with a 2m01.253s, Feeney immediately reclaiming top spot with a 2m01.194s on his next lap.
The battle continued on their next laps, Engel moving back ahead with a 2m01.089s despite dropping a wheel on the exit of the final corner.
Feeney was able to improve on his next lap as well, but fell a hundredth of a second short of Engel's time.
While Feeney decided to call off his charge at that point, Engel stayed out for a final run, which yielded an incredible 2m00.881s.
That is now the fastest ever official GT3 lap around Mount Panorama, Engel having only reset that benchmark in regular qualifying earlier today.
"It's amazing. I'm a bit lost for words," said the German.
"The grip level this weekend has been amazing. It's partly due to the new tyres but also just he grip around this place. It's mega."
Matt Campbell ended up third fastest in the #912 Manthey EMA Porsche, the local star making big gains late in the session as he closed to within a tenth of Feeney.
That car will be joined on the second row by the #75 SunEnergy1 Racing Mercedes thanks to Jules Gounon's Shootout effort while Dries Vanthoor qualified the #32 WRT BMW fifth.
Those top five spots were occupied by the five cars that ran in the second part of the Shootout, with Chaz Mostert leading the way in the first of the 15-minute hit-outs.
Mostert's 2m01.869s means the #65 Melbourne Performance Centre Audi will start sixth, best of the Pro-Am entries.
Mattia Drudi qualified the #74 MPC Audi seventh, Maxime Martin was eighth in the #46 WRT BMW, Aaron Cameron ninth in the #44 Valmont Racing Mercedes and Daniel Juncadella 10th in the #77 Craft-Bamboo Mercedes.
The 2023 Bathurst 12 Hour starts at 5:45am local time tomorrow.
Watch the race live and free on Motorsport.tv (not available to viewers in Australia or New Zealand).