Dunlop, 27, lapped the course at 132.36mph on his BMW superbike and was only four seconds outside John McGuinness' absolute lap record.
The Ballymoney man's speed of 131.34 in the Superstocks improved his own previous best lap of 131.22.
Ian Hutchinson was second fastest in the Superbike class with 131.66.
Eleven-time TT winner Hutchinson, 36, produced his time on his Tyco BMW Superbike from a standing start.
Honda-mounted John McGuinness made up the top three in the blue riband class with 131.12, followed by his Honda team-mate Conor Cummins (129.99) and Yorkshire's Dean Harrison on a Kawasaki (129.97).
Fermanagh rider Lee Johnston, riding a Triumph, clocked the fastest Supersport speed of the week at 124.84mph to lie sixth overall in the leaderboard.
Bruce Anstey, the quickest Supersport rider to date with 124.508, came off his Superbike machine at Keppel Gate on Thursday evening, but walked away with a suspected minor ankle injury.
Michael Rutter moved to the top of the Lightweight Supertwins leaderboard with a lap of 118.054mph, just bettering Ivan Lintin's speed of 118.000mph set on Tuesday night.
Meanwhile, Tim Reeves and Patrick Farrance posted a lap of 114.83mph to send them to the top of the sidecar leaderboard ahead of Dave Molyneux and Dan Sayle.
The final qualifying session is scheduled to take place on Friday night, with the first race, the Superbikes, due off at 11:00 BST on Saturday.

The Welsh beat Moldova 4-0 in their first qualifier, but drew against Austria, Georgia and Serbia.
Chris Coleman's side are third in Group D, four points behind the Republic, who are top.
"We've been unlucky where we've drawn a few games we felt we should have won," Burnley's Vokes told BBC Radio Wales.
The side finishing top qualify automatically, with eight of the nine second-placed teams facing play-offs to reach next year's World Cup in Russia.
Vokes added: "We've been apart for a few months, but if we can look back and take confidence from the last few performances, then I definitely think we can get the right result out there."
The 27-year-old knows they must win in Dublin to boost their chances of qualifying for a first World Cup since 1958. He says Real Madrid forward Gareth Bale and Arsenal midfielder Aaron Ramsey will provide welcome relief after struggling with injuries this season.
"It's good news for the team. They're two very important lads in our squad," he added.
"It's great to see they are back in training and fit and ready to go."
Burnley travel to the Liberty Stadium on Saturday hoping to seal a win that could send them into the top half of the Premier League table.
The Clarets lost against Swansea City at home on the opening day and Vokes is aware of the threat they pose given their recent return to form.
"We know that if we don't get the right result down there then it closes the gap for us [on the relegation zone]," Vokes said.
"It's important that we get the right results in the next few games to keep that distance between us and the bottom three."

The original film saw Tom Hanks play a man saved from drowning as a boy by a mermaid, whom he meets 20 years later.
Tatum - who will presumably be a merman - is set to co-star with Jillian Bell, according to Hollywood Reporter.
They starred in 2014's undercover cop comedy film 22 Jump Street, which topped the box office on its release.
The original film's director Ron Howard is set to produce the film, along with Tatum.
The film, a rom-com about whether the man will choose to remain on land or join the mermaid in the sea, was nominated for an Oscar for best original screenplay.
This version will be written by Maris Lewis-Ryan and follows on from Ghostbusters, which was remade this year with an all-female lead cast.
Tatum recently starred in Hail Caesar! with George Clooney and Josh Brolin, while Bell is to appear in Office Christmas Party later this year.
Michael Dunlop continued his Isle of Man TT practice week dominance as he set the fastest Superbike lap and set an unofficial Superstock lap record.
[NEXT_CONCEPT]
Wales forward Sam Vokes hopes they can turn their World Cup qualifying fortunes around when they visit the Republic of Ireland on 24 March.
[NEXT_CONCEPT]
Magic Mike star Channing Tatum is to play the mermaid in a remake of 1984's film Splash, taking the role played by Darryl Hannah, according to reports.