The seventh-seeded Williams, seeking her seventh Grand Slam title, will face top-ranked Lindsay Davenport (search) in an all-American final Saturday. Davenport rallied to beat 19th-seeded Nathalie Dechy of France 2-6, 7-6 (5), 6-4 in the second semifinal.
"I have to stay focussed," said Williams, the 2003 Australian Open winner who skipped the tournament last year because of a knee injury. "I'm back in a final. It's been such a tough 12 months for me."
The 17-year-old Sharapova, an upset winner over Williams last year in the Wimbledon final and season-ending WTA championship, served for the match at 5-4 in the second set and again at 5-4 in the third.
"I played from my heart. I didn't take my chances. That's what this game is all about," Sharapova said. "The match could have gone either way. She took her chances when she had to and that's the difference. That's why she won."
The third set lasted 66 minutes, and the crowd in the packed Rod Laver Arena cheered and groaned on every point, seemingly not wanting the drama to end.
"I think it definitely lived up to expectations," Williams said. "It was a lot of fun ... I can't believe it's over, I feel like I should still be playing."
After twice trading breaks earlier in the set and saving match points with a string of blistering forehands, Williams saved three break points before holding in the 13th game, setting up game point with a serve-and-volley approach.
She dropped to her knees and punched the air repeatedly when she set up two match points of her own with a winner in the next game.
After finishing off the 2-hour, 39-minute match with a backhand, Williams leaped all the way to the net.
In 2003, Williams saved two match points in a semifinal against Kim Clijsters before reaching the final and beating older sister Venus.
"Two times in a row back from match point down .... this is such a special court for me," Williams said after winning her 13th consecutive match at Melbourne Park.
Sharapova needed only four winners in the first set, earning two service breaks as she blunted most of Williams' power and then only needed to keep the ball in play.
In the first game of the second set, a ballboy bounced a ball at Williams and she smacked it into the stands in pure frustration after losing a point to let Sharapova back to 30-all.
After putting away a leaping overhead winner to close the third game of the second set, Williams hit a 124-mph serve — the fastest by a woman in the tournament — to hold after saving a break point with another powerful overhead in the seventh game. And again she grunted "Yes!"
Williams broke Sharapova's serve in the 11th game of the second set and held to even the match at one set apiece.
Williams looked fitter in the deciding set as Sharapova, who had a tough, three-set win over compatriot and U.S. Open champion Svetlana Kuznetsova in the quarterfinals, struggled again in the heat.
"There's nothing negative — I'm 17 years old and I've made it to the semifinals of the Australian Open," Sharapova said. "This is not a sprint, it's a marathon. Of course I'm sad, it's a tough one to lose. But I've got a long way ahead of me."
Davenport, healthy after a bout of bronchitis just before the Australian Open, had problems with her serve, mixing 10 double-faults with 11 aces. She hasn't been in a Grand Slam final since the 2000 U.S. Open and hasn't won a major since the Australian Open earlier that season.
After two three-set matches Wednesday — her singles quarterfinal and a doubles semifinal win — Davenport clearly looked tired.
"It's been a long two days," she said. "It wasn't my greatest day playing tennis — but I'll take it."
Dechy, seeded 19th, was in a Grand Slam semifinal for the first time after failing to get past the fourth round in 36 previous majors. She was only two points from winning the match at 5-4 in the tiebreaker, before Davenport won three consecutive points to force it into a deciding third set.
Dechy broke Davenport's serve three times in the first set, including the ninth game when she converted triple set point with a forehand service-return winner.
Davenport broke Dechy to go ahead 2-1 in the second set and served at 5-4 to level the match. But she double-faulted on her first set point, sent a backhand wide on the second, then double-faulted and sent a forehand sailing long to give Dechy the break.
Davenport broke Dechy in the next game and again served for the set, but squandered another three set points, double-faulting twice along the way as Dechy broke to force a tiebreaker.
She cashed in on her sixth set point when Dechy double-faulted.
Davenport finished with 48 winners and 52 unforced errors. After an exchange of breaks in the deciding set, she gained triple match point on Dechy's forehand error and finished it in 2:12 when Dechy dumped another forehand into the net.
Top-ranked Roger Federer faced No. 4 Marat Safin on Thursday night for a place in Sunday's men's final. Federer beat Safin in the 2004 final.
Andy Roddick was leading 6-3, 7-5, 4-1 when Nikolay Davydenko retired from their quarterfinal after just 1:35 Wednesday because he was having trouble breathing.
That was less time than Roddick's semifinal opponent, Lleyton Hewitt, needed for the fifth set alone before getting past Argentina's David Nalbandian 6-3, 6-2, 1-6, 3-6, 10-8 in 4:05.
Hewitt's marathon win ensured the top four seeded men made the semifinals in the Australian Open for the first time since 1988, and at any Grand Slam tournament for the first time since Wimbledon in 1995.
The Roddick-Hewitt semifinal is Friday night.