The American won the battle between the world's top two players to pick up her 58th career title.
In the men's draw, Roger Federer will be chasing a 19th win over home favourite Lleyton Hewitt when the two 32-year-olds renew their friendly rivalry in Sunday's final.
Both players needed three sets to reach the final with top seed Federer beating Frenchman Jeremy Chardy 6-3 6-7 (3-7) 6-3 and Hewitt downing Japan's Kei Nishikori 5-7 6-4 6-3 in stifling conditions.
The women's final lacked the intensity of Williams' victory over Maria Sharapova on Friday but lived up to its promise in a pulsating second set.
The world number one's serve was far more consistent than in her previous match and she did not face a break point in taking the first set.
She was gifted the only break in the seventh game when Azarenka blasted a forehand wide down the line.
The American then sealed the set with an ace and an early end to the match seemed likely when she broke the Belarusian in the first game of the second set, but instead it brought her opponent to life.
Azarenka broke Williams twice to take a 4-2 lead but lost her own serve to restore parity.
In the crucial 11th game, Williams hit a vicious backhand down the line to secure her third break of the set and then served out for victory.
Her second set efforts showed Azarenka is not far off from toppling Williams, who she split four matches with last year, and after the match said: "I hope to meet you in Melbourne."
Williams is also eyeing another meeting between the pair before they leave Australia.
"I hope we do play in Melbourne too because that would mean we'd be going the farthest," Williams said.
Conditions were far easier for the women finalists than for the first men's semi-final between Hewitt and Nishikori, where both players struggled as the temperature reached 42 degrees.
"When you just come off the court it feels like it's the worst you've played in," Hewitt said.
"It was a really heavy humidity feel out there. I was sweating just walking out to have my warm-up."
Federer was far from his best against Chardy, losing the second set in a tiebreak. However, crucially as his French opponent's serve fell apart in the third set, Federer swooped to set up a 27th meeting with Hewitt.
"Jeremy has a great serve and made it tough for me," said Federer, who has won 16 of his last 17 meetings with the Australian.
"It will be very different against Lleyton. He has the game to cause me a lot of problems."
(Editing by Pritha Sarkar)
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