Not out said umpire Sundaram Ravi. Refer please, asked New Zealand and after more than four minutes - at which point Lyon was three-quarters of the way back to the pavilion - Llong ruled not out.
The spot showing up "could have come from anything", Llong said while deliberating.
Reaction was swift.
"Horrible five minutes of cricket and a terrible decision by third umpire Nigel Llong," spin legend Shane Warne tweeted.
"Clearly Lyon was out."
Added former Australian opener Matt Hayden: "OMG - 2 and half minutes the game will never get back."
The hour that followed was cruel for New Zealand as the reprieved Lyon and gritty wicketkeeper Peter Nevill equalled the ninth-wicket record against New Zealand, 74.
By the time Lyon was out, the gap between the teams had trimmed from 84 to 12. New Zealand had been burnt badly.
New Zealand fans with longish memories will recall Boxing Day 1980 when Australia were 261 for nine and Lance Cairns bowled a gentle bouncer at last man Jim Higgs, a renowned bunny.
He edged it to the wicketkeeper but the umpire ruled the delivery was intimidatory.
Higgs lasted 96 minutes and made six as Doug Walters reached a century. Sixty more were added.
Mitchell Starc, hobbling with a foot fracture, slapped 20 in four blows off Mark Craig to ram home the pain after Lyon's dismissal for 34.
When it ended, Australia were 22 runs ahead. It had been a dispiriting 80 minutes for New Zealand, a rousing fightback by the hosts.
Nevill held Australia together with a resolute 66, last man out to a fine diving catch at deep point by Santner off the impressive Bracewell.
His figures were the pick for New Zealand, and well deserved.
At the dinner break, after half an hour's batting, New Zealand were 22 for none, the overall scores exactly even.
Where everyone seemed to be picking the bowling fun would happen only under lights, New Zealand's bowlers had other ideas.
They had been too wide and a touch short in the 22 overs they bowled at Australia on Friday night.
But in the first hour yesterday, Tim Southee, Trent Boult and Bracewell were bang on the job.
They nagged away, beat the bat, and got wickets.
Just as Australia's bowlers prospered on the first day by putting a squeeze on New Zealand, so too that trio did a job on Australia.
Brendon McCullum's terrific run out of luckless Shaun Marsh provided a spark and spinners Santner and Mark Craig provided the late fizz shortly before the interval.
It was a session of top-class work. "Game on," said an admiring Australian writer at the break.
And it was. And still is, despite Llong's mistake.
The match is far advanced. Fifth day? Forget it. They might not need a fourth at this rate.