Williams, who triumphed in the Spanish capital in 2012 and 2013, when she beat Sharapova in the final, swept past local favourite Carla Suarez Navarro of Spain 6-1 6-3.
Sharapova earlier had to recover from dropping the second set and going a break down in the third to beat Caroline Wozniacki 6-1 3-6 6-3.
Suarez Navarro, who had never beaten the American world number one in five previous meetings, was powerless to prevent a fired-up Williams securing a last-four clash against Petra Kvitova.
The Czech fourth seed and 2011 champion cruised past unseeded Romanian Irina-Camelia Begu, who was through to her first premier event quarter-final, 7-5 6-3.
Williams, who saved three match points in Wednesday's victory over Victoria Azarenka, is looking to hone her claycourt game before making a bid for a third French Open crown in Paris starting at the end of this month.
She won a sixth Australian Open singles title at the start of the year, taking her haul of individual grand slams to 19.
"I think Maria is playing well," Williams told a news conference.
"I saw her play today ... she really picked up her level and her game.
"I don't know, right now I think she's probably a big favourite to win this. Yeah, she's playing great."
Dane Wozniacki, a Madrid finalist in 2009 and like Sharapova a former world number one, had her service broken five times by the statuesque Russian, who is chasing a 35th career title.
Sharapova called on her coach for advice after losing her serve at the start of the third set and said it had been a turning point.
"I had a good start but my level obviously dropped and I became much more inconsistent and passive," she told a news conference.
"So I think that a little bit of a switch (helped) and just (being) a little bit more aggressive and going a little bit for my shots, moving forward," she added.
"It was more of a mental change as well. Just looking for the next shot and creating a few extra steps in my footwork."
Sharapova will return to number two in the world if she reaches the final.
Her opponent in the last four will be unseeded Russian compatriot and former world number two Svetlana Kuznetsova, who saved two match points to overcome Czech 13th seed Lucie Safarova 5-7 7-6(5) 7-6 (3).
(Reporting by Iain Rogers, editing by Justin Palmer)
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