The Briton, who has a 14-point lead over Vettel after eight races, lapped the Red Bull Ring with a best time of one minute 04.579 seconds in the late afternoon on the hardest tyre available.
He had also been quickest in the overcast opening session in 1:04.839.
Finnish team mate Valtteri Bottas was second in both, at 0.127 and 0.176 slower respectively.
"It's been a good day so far -- pretty straightforward with no real issues," said Hamilton, who like Vettel has won three times this season.
Red Bull's Dutch driver Max Verstappen was best of the rest in the first session, at a circuit owned by the energy drink company, but slipped back to fifth later on and behind Australian team mate Daniel Ricciardo.
"Today was a bit average. I sustained a bit of damage to the floor in FP2 (second practice), running most of the session with that wasn’t ideal. I think it was sustained from vibration from the inside kerbs," said Verstappen.
"This compromised the feel of the car so resulted in a bit of a flat day."
Mercedes have brought aerodynamic improvements to Austria, after a new engine was introduced at the previous race in France which Hamilton won.
The reigning champions have won every race at Spielberg since Austria returned to the calendar in 2014.
"The car feels better in certain areas around the track which is already a step forward from last week," said Hamilton.
"The car felt immediately better coming out of the garage in FP1."
Bottas, winner in Austria last year from pole, also agreed that the updates were working well.
Mercedes, Red Bull and Ferrari filled the top six places on the timesheets in both sessions, with Ferrari's Kimi Raikkonen sixth in both.
MCLAREN TESTING
French driver Romain Grosjean - who has yet to score a point this season - was seventh in both on a promising day for the U.S.-owned Haas team.
Monegasque rookie Charles Leclerc, who has been impressive in the Sauber and is seen as a likely replacement for Raikkonen at Ferrari, continued his strong form with the ninth and 12th best times.
Honda-powered Toro Rosso had Pierre Gasly inside the top 10 in both sessions, although he damaged the car's suspension in the second stint.
Poland's Robert Kubica made a Friday appearance for Williams, replacing race regular Sergey Sirotkin for the morning only, but was the slowest man on track.
McLaren had another lacklustre day, with Fernando Alonso and Stoffel Vandoorne 17th and 18th respectively in the opening session, although the Spaniard was testing aerodynamic details.
Alonso dropped to 19th in the later practice, with only Canadian Lance Stroll slower in the Williams, but Vandoorne moved up to 10th.
McLaren have said they know they have an aerodynamic problem but cannot fix it in the wind tunnel, meaning they have to use practice sessions for testing.
(Reporting by Alan Baldwin; Editing by Andrew Roche and Ed Osmond)
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