Extending its winless streak against Italy in major tournaments to eight matches, Germany had no answer for Balotelli nor Antonio Cassano's creativity.
In the 20th minute, Balotelli had no trouble getting past Holger Badstuber to head in a pinpoint cross from Cassano. Then in the 36th, the 21-year-old striker received the ball behind the defense and blasted a long shot into the top right corner.
While he did score against Ireland, Balotelli was criticized for wasting numerous chances against Spain, Croatia and England.
"This is the greatest night of my life, but I hope Sunday is going to be even better," said Balotelli, who went over to his mother after the match and dedicated the goals to her. "In the opening matches I had a lot of chances, and I wasn't able to finish them. But In football you also need luck."
Germany failed to trouble Italy for much of the match, but Mesut Oezil scored a consolation penalty in injury time after Federico Balzaretti was whistled for a handball.
Germany had entered the game on a world record 15-match winning streak in competitive matches.
"It's a very bitter defeat," Germany captain Philipp Lahm said. "We tried everything in the second half but our goal came too late. We have so much potential in our team but if we cannot give the right performance at the right time or are not clever enough, then we lose such a game."
Italy will face defending champion Spain in Sunday's final in Kiev, Ukraine — a rematch of their 1-1 draw that opened Group C.
"We showed we're on Spain's level and that's where we started this run," Italy midfielder Claudio Marchisio said. "It's no longer a question of fear. Now we've got to pull out everything we still have inside ourselves."
While Italy has won four World Cups, it's only European Championship title came in 1968. Like when they won the 1982 and 2006 World Cups, the Azzurri have managed to maintain their focus despite a match-fixing and betting scandal at home.
"All I can say is that when you talk about Italy, everyone needs to be careful," Italy coach Cesare Prandelli said. "We played an extraordinary match. We displayed a model of fair play and attachment to this shirt."
On a pleasant evening at the National Stadium Warsaw, Cassano set up the opening goal by befuddling Germany defenders Mats Hummels and Jerome Boateng to lift the ball in Balotelli's direction.
"We did what we had thought would put them in trouble," Prandelli said. "We played centrally and looked for one-on-one opportunities with Cassano."
The second goal began with a long vertical pass from Riccardo Montolivo, whose mother is German. Balotelli collected the pass with his back to the goal, controlled the ball with his chest and then sprinted forward and unleashed a blazing shot from the edge of the area as Germany goalkeeper Manuel Neuer again stood immobile.
With three goals, Balotelli moved level with four other players for the tournament scoring lead. After the match, Prandelli was asked if this was the best match of Balotelli's career.
"Balotelli's career has just started," Prandelli said.
Balotelli took off his jersey after his second goal, which drew an automatic yellow card, although he will not miss the final.
Even before scoring, Italy controlled the pace of the match, although Germany did have several chances from Hummels, Toni Kroos and Oezil.
In the 35th, Italy goalkeeper Gianluigi Buffon preserved the Azzurri lead by swatting away a long shot from Sami Khedira — and Balotelli doubled the lead a minute later.
To start the second half, Germany coach Joachim Loew brought on Miroslav Klose for Mario Gomez at center forward and replaced Lukas Podolski with Marco Reus on the wing.
With Germany appearing slightly more organized, Lahm had a great look at the goal in the 49th but shot way over the bar.
"If we had scored earlier, there could have been more for us," Loew said. "The disappointment is great. Nobody is speaking in the dressing room. The players are crying. ... But I am not going to question everything we've done. This team has great quality. It will continue to develop and learn."
Buffon made another impressive save in the 62nd, leaping to push a free kick from Reus off the bar.
While Italy largely sat back and protected its lead in the second half, the Azzurri did produce some dangerous counterattacks. Marchisio shot just wide in the 67th and 75th and substitute Antonio Di Natale missed another chance in the 82nd.
Di Natale came on in the 70th after Balotelli went down with a cramp to his left leg.
White-clad German fans greatly outnumbered Italian supporters, unveiling a huge banner before kickoff that featured a giant "G'' for Germany. However, most of the stadium was filled with Polish fans who supported Italy.
They had plenty to cheer about.
"We're living a dream along with millions of Italians," Italy defender Giorgio Chiellini said. "We're going to enjoy this victory a little longer, then we'll think about Sunday, because we want to continue dreaming."
