The ninth-seeded Spaniard joined Roger Federer in the last four, keeping alive the prospect of a dream final between the two great rivals who have claimed 31 grand slam titles between them.
Having not reached a major semi-final since his 2014 French Open title, the 30-year-old Nadal produced a match from his halcyon days to fell the third-seeded Canadian in two hours and 44 minutes at a floodlit Rod Laver Arena.
Nadal will play 15th seed Grigor Dimitrov of Bulgaria for a place in the final - with Federer taking on fellow Swiss Stan Wawrinka in the other semi - after the Spaniard emphatically batted away doubts that his best days were long gone.
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"I think I am not a very arrogant person so I always have doubts," he said in a court-side interview.
"Even when I was winning I had doubts and even more so when I had injuries. But doubts make you work harder.
"I have had a great career but I had some tough moments so that makes me enjoy moments like this even more," he added.
Nadal had to save six set points as Raonic pressed hard in the second set but he was clinical on the big points and broke the Canadian to love to wrap up the match in style.
The Rod Laver Arena terraces roared their approval as the 2009 champion pumped his fists in celebration, having endured two lean years at the grand slams.
AGGRESSIVE NADAL
Prior to the match, Nadal said he needed aggression or would be "dead" against Raonic, and he made his intentions clear by standing in close against one of the game's biggest servers.
Nadal had his first look at Raonic's serve in the fifth game, a break point going begging when he fired a cross-court passing shot into the net cord.
The Spaniard kept chipping away and passed truly on his next attempt to bring up break points. Raonic, wheeling back to retrieve a defensive lob that appeared set to sail long, then mis-hit the volley to drop serve.
Nadal served out strongly, grabbing the set with an imperious overhead smash.
Raonic took a medical time-out after holding serve to lead 3-2 in the second set and emerged to pressure Nadal's serve.
A double-fault from the Spaniard offered two set points when he was serving to stay in the set at 5-4.
Nadal saved them both and then a third with a trademark full-swinging forehand down the line.
The threat passed when an off-balance Raonic parried a volley into the net and Nadal roared "vamos!" as the terraces cheered.
The match shifted up a gear in the tiebreak, both players unleashing an array of exquisite shots.
Raonic curled a sumptuous lob flush into the corner to win another two set points, but lost them both, the second with a double-fault.
The Canadian sprayed a forehand wide at 7-6, and Nadal crunched a huge serve to edge ahead.
With the tension reaching boiling point, Raonic pounded a huge forehand cross-court, but it nicked the net cord which sent the ball flying into the tramlines to hand Nadal the set.
The Canadian returned to his chair fuming, having let slip six set points, where Nadal had needed just one.
Raonic did not lie down, however, holding serve grimly against some furious counter-attacking before everything came apart in the 10th game.
Facing three match points, Raonic rushed forward to try to counter the relentless Spaniard, and a last desperate volley fell short to leave Nadal pumping his fists in celebration.
(Editing by Ken Ferris)
