Sharapova was the heavy favorite after conceding only nine games in her first five matches, a record at the Australian Open.
But the semifinal started badly for the 25-year-old Russian, serving double-faults to lose the first two points and conceding a break in the first game.
Li was the first Chinese player to reach a Grand Slam final when she lost to Kim Clijsters at Melbourne Park in 2011. She had her breakthrough a few months later when she won the French Open, beating Sharapova in the semifinals along the way.
The crowd got behind Li early in the match, yelling "Come on, Li Na!" and others yelling "Jia You!" which is "Come on" in Chinese. After she broke Sharapova to take a 5-2 lead, the Chinese fans in the crowd shook Chinese flags and shouted again, "Jia You!"
"I don't know what happened (but) I always play well here, so thanks guys," said Li, who was playing her third Australian Open semifinal in four years. "I just came to the court feeling like, `OK, just do it."'
The heat and the speed of the court surface suited Li's game.
She broke Sharapova in the third game of the second set and served an ace to move within a point of a 4-2 lead, but lost the next three points to give her opponent a break opportunity.
Two big second serves took Sharapova by surprise, and Li fended off the challenge.
Li's coach, Carlos Rodriguez -- who worked with retired seven-time major winner Justine Henin -- pumped his fist over his heart after Li won the game.
Sharapova had control in her next service game, but Li scrambled from side to side and pushed the reigning French Open champion to go for the lines, getting a series of unforced errors and another break.
The sixth-seeded Li has been working since August with Rodriguez, and credits him with reviving her career with a renewed emphasis on condition.
"I'm happy. I know I have a tough coach, a tough physio," Li said, looking across to the stands and adding: "You don't need to push me anymore. I will push myself."
Sharapova, who lost the 2012 Australian final in straight sets to Azarenka, admitted it was hard to get into the match against Li.
"She was certainly much more aggressive than I was, dictating the play. I was always on the defense," said Sharapova, who could have gained the No. 1 ranking by reaching the Australian final. "When I had my opportunities and break points in games that went to deuce, I don't think any of them really went my way."
The composition of the women's semifinals was somewhat unexpected.
Stephens produced the upset of the tournament to advance to a Grand Slam semifinal for the first time with her 3-6, 7-5, 6-4 victory over 15-time major winner Serena Williams on Wednesday. Williams, who had been bidding for a third consecutive Grand Slam title, hurt her back in the second set and, after leading by a set and a break, ended a 20-match winning streak.
While there were surprises in the composition of the women's last four, the makeup of the men's semifinals was as expected.
Top-ranked Novak Djokovic will continue his bid for a third consecutive Australian title when he takes on No. 4 David Ferrer on Thursday. No. 2 Roger Federer and No. 3 Andy Murray will meet Friday.
