Australian star Parkinson, 31, nailed a near-perfect 9.87 mid heat to beat the in-form Reynolds, whose two wave total of 14.77 would have taken him through three of the six third-round heats contested on Sunday.
At his home venue of Snapper Rocks, Queensland, Parkinson wowed the crowd with some fantastic forehand surfing.
“That was pretty exciting,” Parkinson said. “Dane is one of the best anywhere and yeah, I was nervous before the heat.
“It came down to waves and that one I got mid-heat was one of the better waves that came through this afternoon.
“It is a huge confidence builder as he’s probably the most dangerous guy in the draw and he has nothing to lose. That said, I’m prepared for this season. I’m confident in my surfing and I’m just enjoying this first event.”
It was a good day in general for home surfers as Adam Melling, Taj Burow and Julian Wilson also moved into the fourth round. At least one more will progress, with Josh Kerr facing fellow Aussie Matt Wilkinson, while Bede Durbidge and world number three Mick Fanning are also in action.
American legend Kelly Slater, ranked second, and highly-rated South African Jordy Smith are also up on Monday, when the six remaining round-three match-ups will be contested.
Round 3 results:
Adam Melling (AUS) advances past John John Florence (HAW)
Jeremy Flores (FRA) 15.50 def. Kai Otton (AUS) 13.13
Taj Burrow (AUS) 14.66 def. Filipe Toledo (BRA) 13.43
Julian Wilson (AUS) 13.80 def. Sebastian Zietz (HAW) 12.27
Michel Bourez (PYF) 17.90 def. Alejo Muniz (BRA) 17.57
Joel Parkinson (AUS) 16.04 def. Dane Reynolds (USA) 14.77
Remaining round 3 match-ups:
Kelly Slater (USA) vs. Dusty Payne (HAW)
C.J. Hobgood (USA) vs. Bede Durbidge (AUS)
Josh Kerr (AUS) vs. Matt Wilkinson (AUS)
Gabriel Medina (BRA) vs. Brett Simpson (USA)
Jordy Smith (ZAF) vs. Travis Logie (ZAF)
Mick Fanning (AUS) vs. Nat Young (USA)