The four-times world champion topped the timesheets with a best effort of one minute 12.720 seconds in the afternoon. Mercedes title rival Lewis Hamilton had been fastest before lunch.
The German was the only driver to break the one minute 13 seconds barrier.
Triple world champion Hamilton, six points behind after five races, was only eighth in the later practice with a lap of 1:13.873, more than a second off the pace.
The Briton, last year's winner in Monaco, had produced a 1:13.425 effort in the morning, when Vettel had to settle for second best.
Hamilton, whose Finnish teammate Valtteri Bottas ended the day 10th, is hoping to equal the 65 career pole positions of late boyhood idol Ayrton Senna in Saturday's qualifying.
"We were good in P1 (first practice) but something went wrong in this session. We need to figure out why," said Hamilton. "This afternoon, for whatever reasons, the tyres weren't working. That's something we have to study and figure out to fix for Saturday."
The top six in the afternoon were all inside last year's pole position time of 1:13.622, set by Australian Red Bull driver Daniel Ricciardo.
Ricciardo was second fastest on Thursday, 0.487 slower than his former teammate Vettel, in a boost for former champions Red Bull, who have had to watch as Ferrari and Mercedes fight for the race wins this season.
Ferrari's 2007 champion Kimi Raikkonen was third fastest, ahead of Toro Rosso's Russian Daniil Kvyat and teammate Carlos Sainz, with Max Verstappen sixth for senior team Red Bull.
BUTTON BACK
Michael Schumacher remains the last Ferrari driver to conquer Monaco, whose tight and twisty harbourside street circuit promises to be an even greater challenge this year with faster and wider cars.
"We need to get into the rhythm and Monte Carlo is a lot about confidence at the end of the day, so you need to trust your car," Vettel had said on Wednesday.
"I am confident that we have the tools so it's up to us to find the right set-up to get into groove and have the confidence. Wider car and wider tyres - it makes the track more narrow I guess."
Under cloudy morning skies, Britain's Jenson Button returned to the cockpit as a McLaren stand-in for Fernando Alonso, who is competing at the Indianapolis 500 on Sunday.
The 2009 champion was 14th fastest in the morning and 12th in the afternoon with a time only a fraction slower than Belgian teammate Stoffel Vandoorne - a solid performance for a driver who had not been in a Formula One car since last November.
He also found that some things never change, complaining over the radio about the driving of others.
The second session was briefly red flagged with half an hour remaining when Canadian rookie Lance Stroll, testing the limits on his first Monaco weekend, hit the barriers hard at the entrance to Casino Square. Stroll was not injured.
Britain's Jolyon Palmer also had trouble when his Renault suffered a blown engine.
Practice in Monaco is always on a Thursday since Friday, the usual day for first running on track at other races, is a rest day.
(Editing by Mark Heinrich)
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