Azarenka had not reached the last four at Melbourne Park since going on to retain her title in 2013, but ended that wait with an impressive 6-4 6-1 victory over the third seed on Tuesday.
The 33-year-old from Belarus will do battle with Elena Rybakina for a place in the final following a commanding display on Rod Laver Arena.
Azarenka, the 24th seed, stormed into a 3-0 lead and although Pegula got back on serve at 5-3, she was a set down after being broken for a second time.
The experienced Azarenka clinically grasped her first break-point opportunity of the second set but Pegula hit straight back with a break of her own in the next game.
She was unable to turn the tide, though, as an inspired Azarenka dominated the remainder of the set with another two breaks and losing only a further two points behind her serve.
Azarenka, a winner of two mixed doubles grand slam titles since her last major triumph at this tournament 10 years ago, wrapped up the victory in an hour and 37 minutes.