Seven-time Grand Slam winner Venus benefited from nine Serena double faults en route to a 6-7 (2/7), 6-2, 6-3 victory at the $2.5 million hardcourt tournament.
Venus posted her first win over top seed and defending champion Serena since another three-set victory five years ago in Dubai.
"Serena is at her top level," Venus said. "You can't win every match. You can't win them all.
"She's number one. Nobody wants to play her. If you do, you have to play the match of your life."
Saturday was also their first meeting since Serena thrashed her older sibling 6-1, 6-2 last year in Charleston.
The contest lasted just over two hours as Venus hammered six aces and had just two double faults.
"Big sister taught little sister a lesson," world number one Serena said.
Many of the crucial points in the semi-final came off second serves as Venus won 56 percent of hers compared to just 36 percent for Serena, who still leads their head-to-head series 14-11.
In Sunday's final, Venus will face third-seeded Agnieszka Radwanska of Poland who beat unseeded Russian Ekaterina Makarova 7-6 (7/1), 7-6 (7/3).
The 34-year-old Venus became the oldest player to reach the final of this event in a quarter of a century as she guns for her 46th career singles title.
"I want to go out there and perform well," Venus said. "If I am fortunate enough to win this tournament, then I am sure it will be dance-worthy."
This also marked the first time Venus and Serena appeared on the same court together since Serena's infamous wobble at Wimbledon.
Six weeks ago Serena exited Wimbledon in bizarre fashion. Appearing dizzy and bewildered during a Wimbledon doubles match with her sister as she struggled just to bounce the ball and then double-faulted four times in a row. Serena later blamed her performance on a virus.
Serena, a three-time champion at the event and who was coming off a victory last week in Stanford, fired 19 aces but couldn't overcome her double faults and poor second serves.
- 'What is this, The Enquirer?' -
"I made many mistakes today. When I make so many mistakes it is impossible to win against her," a disappointed Serena said.
"I haven't been able to get into the quarter-finals of a Grand Slam this year.
"At this point, really just looking forward to next year, to be honest."
Serena then bristled at a reporter's follow-up question about possibly overlooking the US Open and how this affects her motivation for the upcoming Grand Slam.
"You're looking at it way too deep," she shot back. "You making a mountain out of a molehill. What is this, The Enquirer?"
She said the reason she is not feeling any pressure heading into the US Open is because of her "really disappointing" season so far.
"I am just saying I've had a really disappointing season, especially in Grand Slams.
"So I am not going to put any pressure on myself. I almost feel like the pressure is lifted because I haven't performed the way I wanted to personally ... I look forward to next year because I don't have any points to defend at any of the slams."
Playing in Sunday's final is especially sweet for Venus who has had a number of health problems the last few years.
In 2011, Venus revealed that she is battling Sjogren's syndrome, a debilitating autoimmune disease.
She said Saturday that prescription drugs are helping her keep the disease under control. Symptoms range from joint pain to a burning sensation in the eyes to digestive problems and fatigue.
"There are typical drugs, pharmaceuticals, whatever you like to call them, pharmaceutical grade drugs that are typical treatments for Sjogren's and what I have. So that's what I do," Venus said.