Both sides were presented with an abundance of chances in an enthralling first half, despite there being no goals before the break.
The Spaniards were denied a golden opportunity to take the lead by exceptional goalkeeping from Gianluigi Donnarumma.
After cleverly working the ball into the box, Dani Olmo struck a low-driven effort goalwards but was denied by a superb reaction save.
Italy's first clear chance of the game came on the brink of half-time when Emerson's effort clipped the crossbar.
Linking up well wih Lorenzo Insigne, he overlapped the Napoli man, racing into the Spanish box to unleash a fierce strike from a tight angle but Unai Simon was spared by the woodwork.
A breakthrough eventually came in the second half - much to the delight of Wembley's Italian contingent.
Federico Chiesa was the man of the moment once again for Gii Azzurri, producing a spectacular curling shot out of the reach of the helpless Simon to leave them dreaming of the final.
Spain's unwavered resilience shone through as they perilously pursued a vital equaliser.
Their peserverance paid off when they levelled the tie through Alvaro Morata with just ten minutes left to play.
After Dominico Berardi squandered a vital opportunity to settle the tie for Italy, a potent Spanish counter attack was finished off by the Atletico striker as he coolly slotted past Donnarumma to hand Luis Enrique's side a crucial lifeline.
As Spain pushed on for a late winner they were held out by the rigid Italian defence as the game rolled on into extra time.
With both sides showing visible signs of fatigue, neither were able to conjure up a moment of magic that could win them the game - as the two prepared for the most tense penalty shootout of the tournament yet.
Both sides failed to convert their first two penalties, from Locatelli and Olmo, respectively, before the next five spot-kicks hit their mark.
After Morata's tame penalty was saved, Italy's dreams rested on the ever-reliable Jorginho.
And, in trademark fashion, he cleverly outwitted Simon to scure Italy a place in the final.
You can read a full match report on Football365.
Stats of the day
As per OptaJoe: Italy have become just the second side in European Championship history to have as many as five different players (Chiesa, Pessina, Insigne, Immobile & Locatelli) score 2+ goals at a single edition of the competition, after France in 2000.
Spain have failed to progress from a semi-final of a major tournament (World Cup/Euros) for the first time in their history, having previously reached the final in each of their previous five semi-final appearances.
Yet another important victory for Roberto Mancini's side sees them extend their unbeaten run to 33 games as they look to win their second ever European Championships, following their victory in 1968.
The final will also take place at Wembley, kicking off at 8pm on July, 11.