Raikkonen set an absolute lap record of 1:38.699 to pip championship leader Hamilton by just 0.011s as Mercedes rediscovered their pace around Marina Bay.
Vettel had been up on his team-mate's time before he hit the wall heavily with his right rear tyre out of Turn 21 and had to abandon to the pits.
"We can recover," said Vettel.
"I think it is close. Especially on the long runs, Red Bull look quick."
The German, 30 points behind Hamilton in the championship standings, was further compromised by a coolant leak - possibly caused by his whack with the barriers - which kept him off track for the remainder of the session and left him ninth on the timesheet.
"He's making too many [errors]," Sky F1's Martin Brundle said of Vettel.
"But Kimi is on fire. Where has that been earlier in the year?"
The two title rivals also had a close shave early in the session when Hamilton just avoided ploughing into the rear of Vettel's Ferrari after locking up as they jostled for position.
After setting the pace in Practice One, Red Bull were unable to get close to Ferrari and Mercedes on their qualifying runs, ending up over half a second off the pace with Max Verstappen edging out Daniel Ricciardo for third.
Verstappen's RB14 also suffered a small oil leak before the Dutchman reported suffering engine issues, although he was able to complete the session.
"We struggled to get the balance on the hypersofts absolutely nailed. We have a bit of work to do tonight but the long runs looked encouraging," Red Bull team principal Christian Horner told Sky F1.
Valtteri Bottas was unable to match the pace set by team-mate Hamilton, having to settle for fifth place, 0.669s off Raikkonen's benchmark.
Carlos Sainz continued Renault's claim for best of the rest this weekend by claiming sixth, ahead of Romain Grosjean's Haas and Fernando Alonso's McLaren.
Alonso also had to show quick reactions late in the session to avoid Marcus Ericsson's spinning Sauber.
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