Wozniacki blew a 3-0 lead in the first set and was on the run most of the match before losing for the second time this year to Daria Kasatkina.
Roger Federer will remain at No. 2 behind Rafael Nadal on the ATP tour after successfully defending his Australian Open title and capturing a 20th major with a victory over Marin Cilic on Sunday night.
Wozniacki will also regain the No. 1 ranking next week, six years after she previously held the top spot.
Both women had their chances to put the match away in the 68-minute-long third set but it was the World No.1 who prevailed victorious to reach the finals.
Former No. 1-ranked Wozniacki is potentially one win away from a breakthrough Grand Slam title after advancing 6-3, 7-6 (2) over Elise Mertens on Thursday.
Halep, a two-time French Open finalist, is aiming for another shot at a first Grand Slam title after quickly overcoming a slow start to beat sixth-seeded Karolina Pliskova 6-3 6-2 in the quarterfinals.
Wozniacki, who can return to the No. 1 ranking with her first Grand Slam singles title, plays Elise Mertens in the semifinals.
Nadal will next play sixth-seeded Marin Cilic, who collected his 100th Grand Slam match win with a 6-7 (2), 6-3, 7-6 (0), 7-6 (3) victory over No. 10 Pablo Carreno Busta.
Wozniacki could return to the top ranking if she reaches the semifinals at least and a combination of other results go her way.
Wozniacki faced criticism during her first stay at No. 1 — which included year-end top rankings in 2010 and 2011 — that she'd never won a major, unlike Williams' current 23.
McDonald broke Dimitrov's serve three times in the fourth set and pushed the fifth beyond 12 games, before his first double-fault of the set suddenly gave Dimitrov a match point. Dimitrov finished it off 4-6, 6-2, 6-4, 0-6, 8-6 to enter the 3rd round
The 27-year-old Wozniacki's best previous result at the WTA Finals was reaching the final in 2010.
Williams, who appeared in the Australian Open and Wimbledon finals this season, won the WTA Finals in 2008 and was also a finalist in 2009.
The sixth-ranked Wozniacki, a finalist in 2010, leads the tour with most match wins in the season at 59-21 as the Dane heads into Sunday's championship match.
In the semifinals, Garcia will play Venus Williams and Wozniacki will face Karolina Pliskova.
Wozniacki is now 2-0 at the season-ending tournament, while Halep is 1-1.
The victory gives Wozniacki her first title of the year. The Dane had lost all six of her previous finals in 2017.
Playing in her first tournament since earning the WTA's top ranking, Wimbledon champion Muguruza had 29 unforced errors to drop the final 10 games of the match.
It was Svitolina's fourth victory over a top-10 opponent this week and third win in two days.
Caroline Wozniacki, the No. 6 seed from Denmark, will play fifth-seeded Elina Svitolina in Sunday's final.
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