Loeb is just four points behind Gronholm in the overall standings

The reigning world champion had led overall leader Marcus Gronholm by three seconds overnight but has now increased that lead to more than 40 seconds.

Mikko Hirvonen is in third, one minute, 57.3 seconds off the lead.

"We had a great day and the car is going perfectly," said Loeb, who was helped by a switch to dry tyres as conditions dried out.

"Two times we had the best tyre choice. Now we are harder tyre-wise than the rest, and the car has been very good, so we are able to be faster than everybody else.

"I'm surprised by my advantage over Marcus. Nothing is decided yet though, so I'll keep pushing on."

Gronholm went into the event just four points ahead in the overall standings.

He said: "Yes we took the wrong tyre, it's not so good, but this is life."

Cumbria's Matthew Wilson had been on course for a top-10 spot but hit trouble late in the day and dropped to 13th position.

Rally of Portugal standings after day two:
1. Sebastien Loeb (Fra) Citroen 3:00:25.5
2. Marcus Gronholm (Fin) Ford +40.5 secs
3. Mikko Hirvonen (Fin) Ford +1:57.3
4. Petter Solberg (Nor) Subaru +2:10.3
5. Daniel Sordo (Sp) Citroen +3:59.4
6. Jari-Matti Latvala (Fin) Ford +4:50.2
7. Henning Solberg (Nor) Ford +6:49.0
8. Daniel Carlsson (Swe) Citroen +6:55.6
9. Gianluigi Galli (It) Citroen +8:12.8
10. Manfred Stohl (Aut) Citroen +11:20.6