Top seed Williams, who at 33 is 14 years Keys' senior, faces Sharapova on Saturday after the Russian trounced compatriot Ekaterina Makarova 6-3 6-2 in the earlier semi-final.
Williams was pushed hard by her 19-year-old challenger in an absorbing duel between two of the game's hardest hitters on a cool and windy day at Rod Laver Arena.
Keys burnished her credentials as the next torchbearer for American tennis, defiantly saving eight match points as her opponent roared in frustration before Williams sealed the contest with a thumping ace down the middle.
"She's obviously a great player," Williams said courtside, still suffering a cold and breaking into coughs.
"I think she's going to be winning this tournament very soon and lots of other grand slams.
"I was really happy to see her do so well and be such a great sport at the same time."
Williams, who retains her world number one ranking by reaching the final, will face the woman she has tormented for over a decade in 27-year-old Sharapova, a five-time grand slam champion with a 2-16 losing record to the American.
The last time Sharapova beat Williams was at the Tour Championships in 2004.
Sharapova, a 2008 champion at Melbourne Park, lost to Williams in the 2007 final and again in the final at the 2013 French Open.
TERRIBLE RECORD
Most streaks are eventually broken and Sharapova, fit and in ominous form, will take heart from her win over Makarova, having underlined the yawning gap between the best and the rest.
"I think my confidence should be pretty high going into a final of a grand slam no matter who I'm facing against and whether I've had a terrible record, to say the least, against someone," she said.
"It doesn't matter. I got there for a reason. I belong in that spot. I will do everything I can to get the title."
As with her trouncing of quarter-final opponent Eugenie Bouchard, Sharapova's game-plan seemed devastatingly simple -- winding up the forehand and bludgeoning anything remotely short of the baseline.
A nervous Makarova appeared wanting for any strategy, however, as she racked up unforced errors and shot tortured glances at her player's box in the opening games.
Sharapova will be busy before Saturday's final working out how to beat Williams after 15 straight losses.
"I think her power and her aggressiveness, I think that's always made me a little bit too aggressive, maybe going for a little bit more than I had to," she said.
"She's great at making players hit that shot that you don't necessarily have to go for.
"It's been a really difficult matchup for me but I am a competitor."
Sixth seed Andy Murray will bid for a fourth final at Melbourne Park when he takes on seventh seed Tomas Berdych in the first men's semi-final in the evening session.
(Editing by Peter Rutherford)
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