Dimitrov, seeded 22nd, defeated Roberto Bautista Agut 6-3, 3-6, 6-2, 6-4, dropping his serve once and posting four breaks -- his final one ending the match in about 2 1/2 hours.
Both players had five break chances but Bautista Agut was able to cash in just one as Dimitrov took 70 percent of the points on serve.
Dimitrov, 22, had never before reached the third round of a major tournament and he'll join seven of the top eight men's players in the quarterfinals at Melbourne.
The lower half of the draw played to form with No. 2-ranked and three-time defending champion Novak Djokovic gaining the quarterfinals along with third-seeded David Ferrer, No. 7 Tomas Berdych and eighth-seeded Stanislas Wawrinka still going.
Nadal, fourth-seeded Andy Murray and No. 6 Roger Federer join Dimitrov in the top half of the draw. The only Top 8 player not still in the tournament is No. 5 Juan Martin del Potro, who lost to Bautista Agut in the second round.
Nadal battled No. 16-seeded Kei Nishikori for nearly 3 1/2 hours before claiming a 7-6 (7-3), 7-5, 7-6 (7-3) win. Nadal had his serve broken four times in the match and was behind a break in both the second and third sets.
But Nadal still won two-thirds of the points on serve and had 36 winners against 28 unforced errors. Nishikori, who fell to 0-6 lifetime versus Nadal, had 51 unforced errors.
Murray, the Australian Open runner-up three of the last four years, got by Stephane Robert 6-1, 6-2, 6-7 (6-8), 6-2. Murray was in control early, winning almost two-thirds of the points in the first two sets, but failed to finish off two match points in the third set. He was back on form in the fourth, taking 27 of the 41 points.
Federer wrapped up the fourth round with a sharp 6-3, 7-5, 6-4 win over 10th-seeded Jo-Wilfried Tsonga. Federer, advancing to the quarterfinals in Melbourne for an 11th consecutive year, didn't allow Tsonga a break opportunity until he was up 4-3 in the third set. Federer saved that point and served out the match. He won 80 percent of the points on serve.
Federer goes against Murray in the quarterfinals. Murray is 11-9 in his career versus Federer. Their most recent pairing came in 2013 Australian Open semifinals, with Murray winning in five sets.
Nadal is 3-0 all-time versus Dimitrov but Dimitrov won a set in each of those three-set matches.