World number one Serena fought back from 5-1 down in the third set of her semi-final against Belgian fourth seed Kim Clijsters to clinch a thrilling 4-6, 6-3, 7-5 as Venus swept aside Justine Henin-Hardenne 6-3, 6-3.
In the men's tournament, second seed and favourite Andre Agassi blitzed Wayne Ferreira in just 88 minutes to win 6-2, 6-2, 6-3 and will now play either fellow American Andy Roddick or Germany's Rainer Schuettler in the final.
Agassi's whirlwind destruction of unseeded South African Ferreira on the Rod Laver Arena could not have been more different than the see-saw last-four between Williams and Clijsters.
Clijsters had two match points on serve with the score at 5-2 in the decider but was unable to take either of them as the top seed produced a fabulous return and an instinctive volley to hang on and then break.
Clijsters, girlfriend of Australian world number one Lleyton Hewitt, had another opportunity to serve for the match in the 10th game, but fumbled, committing two double faults as Williams scored a break.
Williams held and then broke serve, producing a string of winners to reach her fourth consecutive Grand Slam final and her first appearance in the Australian Open final.
She is now firmly on course to complete her goal of a Serena Slam, adding the Australian Open to the Wimbledon, French and US Open titles she already holds.
If she defeats Venus tomorrow she will become the first woman since Steffi Graf in 1994 to hold all the Grand Slam titles at the same time. Graf also completed a calendar-year Grand Slam in 1988.
"It was an unbelievable battle out there," said Williams. "I kept fighting. I didn't want to lose 6-1. Then I said I don't want to lose 6-2. So I just kept fighting. Next thing I know I came back.
Clijsters was upbeat in defeat, saying she was unable to respond when Williams raised her game.
"I could feel that she was really trying to step it up and that she was hitting the balls a lot more aggressively.
"There were almost no unforced errors at the end. That's when you have to say too good," she said.
While Serena took the scenic route into Saturday's final, Venus opted for a brisk defeat of Henin-Hardenne in her semi on the Rod Laver Arena.
Venus improved her record over Henin-Hardenne to 7-1, with her only loss coming in their first meeting on clay in the 2001 German Open, and is now looking ahead to Saturday's final.
"Four in a row is really nice and it's the best opportunity to take the title home," Venus said.
Serena reigned supreme in the finals of the French Open, Wimbledon and US Open last year.
In the men's semi-final late Friday, Agassi made it 11 straight wins against Ferreira with a ruthless performance.
The seven-time Grand Slam champion was in immaculate touch on Thursday, breaking 31-year-old Ferreira's service six times and crunching 32 winners to 21.
The 32-year-old Las Vegan has now won 20 consecutive matches at the Australian Open. As the two-time defending champion, Agassi withdrew on the opening morning of last year's Open with a wrist injury.
His last defeat on the Melbourne Rebound Ace hardcourts was in four sets to fellow American Vince Spadea in 1999. Agassi said his latest appearance in a Grand Slam final Sunday's will be his 13th since he first appeared in the French Open final in 1990 was sweeter than ever.
"Opportunities get fewer, so they become more special," said a delighted Agassi.
As far as Ferreira is concerned, Agassi's opponent in the final, be it Schuettler or Roddick should concede defeat now.
"If he plays like that on Sunday, I don't think either Andy or Rainer can have a chance," Ferreira said.