Two goals in the last two minutes of extra time gifted Italy a 2006 World Cup final berth and hosts Germany were down on Tuesday in Dortmund.
After the 2-0 win, three-time world champions Italy will go to Berlin, striving for their fourth title on July 9 against the winner of France-Portugal clash. Germany, who had also collected three World Cup titles, had to travel to Stuttgart for the third-place playoff on July 8.
Italian coach Marcello Lippi said that Italy's success in reaching the World Cup final fulfilled all his dreams as a coach.
"This is the realisation of a dream that has lasted a long time," said Lippi.
"If there was a team that was going to win this game, it was going to be us," Lippi said.
"We dominated the match and we were tired at the end and risked a bit, but not too much." he said.
In today's breath-taking and dramatic semifinal duel, Italian midfielder Andrea Pirlo worked it to defender Fabio Grosso who lashed an unbelievable curling shot beyond German keeper Jens Lehmann's outstretched finger-tips into the far corner just one minute to go.
Pirlo was named Man of the Match by the FIFA Technical Study Group.
As the Germans pressing for an equalizer, Italy broke and took advantage of the home defense going walkabout upfield in the last minute.
Striker Alberto Gilardino had the ball in space, took his time and rolled in Alessandro Del Piero on the left.
The Italian substitute broke German hearts with a clinical finish beyond the advancing Lehmann into the roof of the net.
"I've had some criticism recently, but I demonstrated that my desire is as great as anyone else's," said Piero, the 32-year-old Juventus striker.
"It was fantastic to be part of a match like that," said Piero, who came on as an extra-time substitute.
"To win in their own backyard, and there aren't any words that describe what I'm feeling right now," he added.
Although Italy's goals arrived in the 119th and 120th minutes, Lippi said the their victory was thoroughly deserved.
"In my view we controlled the match. We played against 50,000 people - the German supporters were fantastic.
"We played a great game and we played better than Germany for the first 90 minutes.
"We scored two excellent goals. It was good that we avoided penalties because as you know, this is always a lottery.
"They should be proud of what they've done, proud to have respected all the love and enthusiasm that there is in Italy for them." he noted.
Germany coach Juergen Klinsmann felt disappointed after the last-minute loss. But he said," It was a great match and this German team is hopeful."
"We played well in the World Cup and showcase our characteristics," he said.
"The 2006 World Cup in Germany is successful," he added.
The extra time duel was more fantastic than that in regular time.
Only one minute into the extra time, Gilardino, who substituted Luca Toni in the second half, squeezed into the box on the right, turned Christoph Metzelder and sent Lehmann the wrong way but his stabbed shot rebounded off the post and trickled away to safety.
After only two minutes, a corner was worked to Italian defender Gianluca Zambrotta outside the area and he lashed a screamer on to the crossbar.
Just before the end of the first half of extra time, German substitute midfielder David Odonkor's cross was inch perfect but striker Lukas Podolski failed to test Italian keeper Gianluigi Buffon with a header.
In the second half of extra, the hosts had a brilliant chance to lead when Podolski found a space in the box on the left. He lined up his shot but Buffon made a great one-handed save pushing the fierce drive over the bar.
German left-back Philipp Lahm said that It was bitter to lose so close to the end of the match and It's hard to explain it.
"We had set ourselves the target of reaching the semi-finals, but once you've reached that you want to go all the way." the 23-year-old Bayern Munich defender said.
The regular time saw many fouls from both sides.
The Germans' fantastic chance came in the 35th minute when a give-away in the midfield led to German first division top scorer Miroslav Klose finding midfielder Bernd Schneider open in the area, but Schneider's powerful shot flew over the goal.
That was the best scoring chance for either team in the first half.
On 42 minutes, Pirlo's free-kick was right at Mauro Camoranesi, but he could not direct his glancing header on goal.
The hosts fortified their attacks from the beginning of the second half.
In the 50th minute, Klose dribbled between three Italian defenders and ultimately only a desperate tackle by Buffon saved the Italians.
German defender Arne Friedrich burst into the area in the 69th minute after a one-two with playmaker Michael Ballack, but Italian defender Marco Materazzi was on hand to end the danger.
Italian star playmaker Francesco Totti flicked one on for Simone Perrotta who broke into the area all alone in the 86th minute, but Lehmann came out to punch saving the hosts in the regular time.