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The Serbian No.3 seed, who had only beaten Federer once in six previous meetings, avenged his defeat to the Swiss world No.1 in last year's US Open final with a dominant 7-5 6-3 7-6 (7-5) victory.
Djokovic's reward for his impressive triumph is a clash with unseeded Frenchman Jo-Wilfried Tsonga in what will be the Australian Open's first tournament decider between two players yet to win a Grand Slam title since 1998.
In the early stages it was Federer who looked the goods, leading with a break and the chance to grab a second at 0-30 on Djokovic's serve, but from 3-5 down in the opening set Djokovic turned the match on its head.
The 20-year-old won the next five games in a row with a pair of breaks against Federer's serve and by the time he led 5-1 in the second set he'd claimed an amazing nine of 10 games.
Ahead by two breaks Djokovic did tighten up when serving for the second set but he didn't make the same mistake when he had a second chance in the ninth game, despite a warning for taking too long between points.
The third set was an arm wrestle, with Federer having to save four break points in the third game and Djokovic two that were also set points in the 12th, before Federer made the early running in the tie-breaker.
Ahead 3-1 early, Federer again led it 5-4 but Djokovic won the next couple of points to set up match point and then completed the brilliant win when Federer netted a forehand.
Federer's last straight-sets loss at a Grand Slam came when he went down to Brazilian Gustavo Kuerten in the third round of the 2004 French Open, and the defeat was his first at Melbourne Park since the corresponding stage three years ago against eventual champion Marat Safin.
Novak Djokovic - Roger Federer Match Facts
- Djokovic won 118 points to Federer's 104
- There were six breaks of serve, four to Djokovic, two to Federer
- Federer hit 38 winners, Djokovic 50
- Each player made 32 unforced errors
- There were 23 aces, 13 to Djokovic, 10 to Federer
Source: By Australian Open 2008 News Release