After losing the first set and trailing 3-1 in the second, 26-year-old Birrell won 3-6 7-5 6-2 against her friend and former practice partner.
Hon, who had won two qualifiers to make the main draw, led the head-to-head contest between the pair 5-2 going into the match but five had been three-set thrillers.
Qualifier Priscilla Hon led early before going down to Kimberly Birrell in the first round. (Jono Searle/AAP PHOTOS)
Wildcard entrant Birrell has enjoyed a strong finish to the year, including reaching the final of the Japan Open, and she showcased great fight and skill to get back into the match.
The showdown with Navarro will be a step up.
"Obviously she's a great player and had an amazing season.We actually played not that long ago in Hong Kong," Birrell said.
"I think it's great that I've been able to feel her ball. I kind of know what's coming. I think we're playing on maybe New Year's Day so it will be her first match of the year and you never know what will happen.
"These are my home courts, home conditions. I'll give it my best and hope that it's a good match."
Hon and Birrell had a nervous start to the match on Pat Rafter Arena with four consecutive service breaks in the opening set.
World No.167 Hon, also 26, found her groove after serving an ace to take a 4-3 lead. She then broke Birrell and served out the set.
Birrell won an epically long break point to take a 4-2 lead in the third set and didn't look back. (Jono Searle/AAP PHOTOS)
Hon's powerhouse backhand started to find its mark and she found confidence with her serve and volley.
World No.113 Birrell's serve has been a weakness in the past and that came to the fore in the opening set where she won just 30 per cent of points with her first serve, to Hon's 63 per cent.
Hon went out to a 3-1 lead in the second set before Birrell upped the ante. She fought back winning 78 per cent of first serves and attacking Hon's service game.
Hon saved three break points early in the deciding set but Birrell broke in the fourth game. Hon broke back in the fifth.
Birrell won the longest point of the match - 31 shots - to break again for a 4-2 lead. She did not look back.
"I knew that I had to be up for a battle. We've had some long matches," Birrell said.
"When I was down, I knew that if I kept focusing on the process, taking it one point at a time, I'd start to feel the momentum shift."
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