Serbia’s Djokovic, 36, lost 6-1 6-2 6-7 (6-8) 6-3 as Sinner regrouped from not taking a match point in the tie-break.
It ends Djokovic’s bid for a record-extending 11th title and a 25th major to put him clear of Margaret Court.Russian third seed Medvedev, 27, won 5-7 3-6 7-6 (7-4) 7-6 (7-5) 6-3 in a remarkable second semi-final which lasted four hours 18 minutes and finished at 00:06 local time.
Sinner’s elimination of Djokovic means there will be a new name on the Australian Open men’s singles trophy.
The Serb had won 33 matches in a row in Melbourne since losing to South Korea’s Chung Hyeon in the fourth round six years ago.
“It was very, very tough,” said Sinner, who is the first Italian to reach a Melbourne singles final.
“I felt like [Djokovic] wasn’t feeling that great so I kept pushing. I just tried to be ready for the fourth set, which I started off really, really well.
Sinner, 22, faces Daniil Medvedev, who recovered from two sets down to beat Alexander Zverev, in Sunday’s final.