After nearly two months out of action following surgery on her right wrist, Graf overcame a slow start to beat Sugiyama 6-4, 6-3 a day after defeating Romania's Ruxandra Dragomir 6-3, 6-3.
Graf, currently No 22 in the rankings and playing as non-seed at this event for the first time in nearly 14 years, will meet France's Anne-Gaelle Sidot in tomorrow's quarter-final. Graf won the Leipzig tournament from 1990 to 1993.
Graf had trouble finding her timing and clearly showed the lack of match practice early on against the quick Japanese player. But the former world No 1 picked up her game late in the first set and went on to post a workmanlike victory.
"I expected a tough match. She's been playing good tennis in recent months. I played her a few months ago and lost in three close sets," Graf said. "I knew she would be aggressive."
The 19-year-old Sidot managed to upset the top seed Arantxa Sanchez Vicario, the reigning French Open champion. The young Frenchwoman, a qualifier ranked No 74 in the world, beat the Spaniard 6-1, 4-6, 6-2.
Graf was ruled out of the game for nearly two months after having surgery for a bone spur in her right wrist. The 29-year-old German veteran is now ranked No 22 in the world, but she could still qualify for the season- ending Chase Championship in New York, from 16 to 22 November. She also plans to play in a tournament in Philadelphia next week.
Sugiyama, ranked No 18 in the world, broke Graf's serve in the opening game as the German could not find her range. The key game of the match turned out to be the third, Graf's second service game that went to eight deuces. Graf won a long and spectacular rally and then hit an ace to clinch the game after fighting off three break points.
"That was a very important game. I had possibilities to win it earlier and she had chances to break me," Graf said. "Winning this game gave me confidence. I knew it'd be tough to win the first set if I lost that game. She put me under a lot of pressure."
Graf then broke Sugiyama's serve twice as she fought back from a 4-2 deficit to win five games in a row, clinching the first set and going up 1-0 in the second.
The German broke once more for a 4-2 lead and held three match points. She wasted one with a double-fault, hit a slice backhand out on the next, but the Japanese then netted a backhand. Graf, who held the top ranking for a record 374 weeks and dominated the women's game for a decade, now has a 22-0 match record in Leipzig.
In other matches in the indoor tournament, the second seed, Nathalie Tauziat of France, beat Elena Likhovtseva of Russia, 7-6, 6-1, while the third seed, Dominique van Roost of Belgium, overcame the former French Open champion, Iva Majoli of Croatia, 6-4, 6-4.
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