Yuvraj Singh smashed 70 off 30 balls as India, electing to take first strike at the jam-packed Kingsmead, made a challenging 188-5 and then restricted Australia to 173-7 in a rousing semi-final.
Australia, needing 27 off the last 12 balls, were kept down to five runs in the 19th over bowled by left-arm seamer Rudra Pratap Singh and six runs in Joginder Sharma’s last over.
Sharma, who was hammered for 31 runs in his first two overs, was gambled for the final over by Indian captain Mahendra Singh Dhoni and came good with two wickets at the end.
Opener Matthew Hayden hit 62 off 47 balls and Andrew Symonds scored a 26-ball 43 during a rollicking third wicket stand of 66 that came off just 37 deliveries.
Australia, coasting at 134-2 by the 15th over, lost five wickets for 39 runs to hand India a famous win before some 19,000 delirious South African fans waving the Indian flag.
Seamer Shanthakumaran Sreesanth shone with the ball taking 2-12 off his four overs. Irfan Pathan and Sharma also claimed two wickets each.
The final at the Wanderers in Johannesburg on Monday will be the first major title clash between India and Pakistan since the limited-overs world championship of cricket in Melbourne in 1985.
Dhoni chipped in with 36 off 18 balls as India plundered 128 runs in the final 10 overs after a slow start. Yuvraj and Robin Uthappa (34) hammered 84 for the third wicket off just 40 deliveries after India had plodded to 41-2 by the eighth over.
Yuvraj walked in after openers Virender Sehwag (nine) and Gautam Gambhir (24) had fallen against the tight Australian seam bowling. Yuvraj took charge immediately, slamming the first delivery he faced from Stuart Clark for six over square-leg.
Symonds’ first over, the 11th of the innings, produced 19 runs as Yuvraj helped himself to a six and four and Uthappa pulled a short ball for six. Yuvraj brought up his half-century off 20 balls by lofting Clark for his fourth six and Uthappa celebrated his partner’s feat by smashing two consecutive sixes off Mitchell Johnson.
In the first semifinal a blistering innings from Imran Nazir helped Pakistan book their place in the World Twenty20 final after a six-wicket victory over New Zealand at Newlands.
The opener smashed 59 from 41 balls, ably assisted by partner Mohammad Hafeez (32), chasing a target of 144.
A middle order collapse had cost New Zealand vital runs after a promising start, Ross Taylor top-scoring with 37. Umar Gul (3-15) was the pick of the bowlers, with good support from debutant Fawad Alam (2-24) and Shahid Afridi (1-24).
Captain Shoaib Malik fittingly hit the winning runs with seven balls remaining, sparking celebrations among the players and new coach Geoff Lawson.