Extra-time goals from Frank Lampard and Didier Drogba sent Chelsea into a Champions League final showdown against Manchester United in Moscow next month.
Lampard, playing his first game since the death of his mother last week, slotted home a 98th-minute penalty and Drogba, who had opened the scoring in the first-half, sent Chelsea to the final with a timely second.
Fernando Torres had given Liverpool hope with a second-half equaliser but they failed to finish the job and Chelsea made them pay in a pulsating extra period which also saw Ryan Babel grab a late consolation goal for the Reds.
Drogba, a man whose penchant for spending more time horizontally on the pitch had incurred the wrath of Liverpool coach Rafael Benitez prior to kick-off, was clearly a man on a mission as he forced Jose Reina to turn his skidding 18-yard effort around the post in the fifth minute.
Four minutes later Liverpool put together their only meaningful move of the opening half when a quick Steven Gerrard pass put Fernando Torres in behind the Chelsea defence.
Unfortunately, the Spaniard's first touch was not deft enough and although he bore down on Petr Cech, the Chelsea goalkeeper had done enough to close down his space and options.
The slippery conditions hampered both sides but it was Chelsea who mastered them quicker.
In the 18th minute Lampard despatched a delightful pass into the path of Drogba but the Ivory Coast international striker was a yard wide with his shot.
But Chelsea were in the ascendancy and their supremacy was underlined by Michael Essien's 25-yard effort which had to be collected by Reina at the foot of his right-hand post.
Liverpool were struggling to keep pace with the home side and their worries increased when Martin Skrtel was forced off with a knee injury in the 21st minute and he was replaced by Sami Hyypia.
Reina was forced to punch clear a long-range effort from Ballack but the goal Chelsea had threatened for most of the half arrived in style in the 33rd minute.
The architect, as so often this season, was England midfielder Lampard.
He cleverly split the Liverpool defence to give Salomon Kalou the chance to run on and fire a shot that Reina could only palm into the path of the onrushing Drogba.
The Ivorian does not miss such gifts and he sent a low drive fizzing into the net at the near post to give Liverpool a 2-1 aggregate lead.
The Chelsea striker, clearly hurt by Benitez's criticism of his 'diving', then ran the length of the half to celebrate his goal in front of the Liverpool manager.
Chelsea's domination almost brought them a second four minutes before the interval but Ballack's measured free-kick veered just the wrong side of an upright.
Dirk Kuyt almost hauled Liverpool back into the tie three minutes after the restart but his shot met the outstretched leg of Cech before Ashley Cole cleared.
After Lampard's 53rd-minute volley was well held by Reina, Liverpool finally broke their goalscoring hoodoo when Yossi Benayoun carved out a chance for Torres.
The Spaniard collected the ball in his stride just inside the penalty area before sliding it beyond the exposed Cech to make it 2-2 on aggregate - the 64th-minute effort was Chelsea's first at Stamford Bridge in nine games under Benitez.
Liverpool were now unrecognisable from the insipid team of the first-half.
They were pulling Chelsea apart in midfield and the home side were looking decidedly nervy for the first time in the game.
But Chelsea rallied and a fine run by Essien ended when he found the side-netting.
Both sides sought a winner - but the 90 minutes ended all-square and the contest went into extra-time.
Liverpool almost snatched the lead within minutes of the restart but Hyypia's header fell wide of the post with Cech beaten.
Chelsea then thought they had done enough when Essien sent a 20-yard effort into the net - but it was rightly disallowed for offside.
However, in the 98th minute, Ballack was brought down by Hyypia inside the box and referee Roberto Rosetti pointed to the spot.
Lampard kept his composure to send Reina the wrong way and was in tears as he celebrated with his team-mates.
Worse was to come for Liverpool when substitute Nicolas Anelka got free on the right and pulled the ball back for Drogba to fire under Reina.
An error from Cech gifted Babel a late goal but Chelsea held on to reach their first Champions League final.
Lampard, playing his first game since the death of his mother last week, slotted home a 98th-minute penalty and Drogba, who had opened the scoring in the first-half, sent Chelsea to the final with a timely second.
Fernando Torres had given Liverpool hope with a second-half equaliser but they failed to finish the job and Chelsea made them pay in a pulsating extra period which also saw Ryan Babel grab a late consolation goal for the Reds.
Drogba, a man whose penchant for spending more time horizontally on the pitch had incurred the wrath of Liverpool coach Rafael Benitez prior to kick-off, was clearly a man on a mission as he forced Jose Reina to turn his skidding 18-yard effort around the post in the fifth minute.
Four minutes later Liverpool put together their only meaningful move of the opening half when a quick Steven Gerrard pass put Fernando Torres in behind the Chelsea defence.
Unfortunately, the Spaniard's first touch was not deft enough and although he bore down on Petr Cech, the Chelsea goalkeeper had done enough to close down his space and options.
The slippery conditions hampered both sides but it was Chelsea who mastered them quicker.
In the 18th minute Lampard despatched a delightful pass into the path of Drogba but the Ivory Coast international striker was a yard wide with his shot.
But Chelsea were in the ascendancy and their supremacy was underlined by Michael Essien's 25-yard effort which had to be collected by Reina at the foot of his right-hand post.
Liverpool were struggling to keep pace with the home side and their worries increased when Martin Skrtel was forced off with a knee injury in the 21st minute and he was replaced by Sami Hyypia.
Reina was forced to punch clear a long-range effort from Ballack but the goal Chelsea had threatened for most of the half arrived in style in the 33rd minute.
The architect, as so often this season, was England midfielder Lampard.
He cleverly split the Liverpool defence to give Salomon Kalou the chance to run on and fire a shot that Reina could only palm into the path of the onrushing Drogba.
The Ivorian does not miss such gifts and he sent a low drive fizzing into the net at the near post to give Liverpool a 2-1 aggregate lead.
The Chelsea striker, clearly hurt by Benitez's criticism of his 'diving', then ran the length of the half to celebrate his goal in front of the Liverpool manager.
Chelsea's domination almost brought them a second four minutes before the interval but Ballack's measured free-kick veered just the wrong side of an upright.
Dirk Kuyt almost hauled Liverpool back into the tie three minutes after the restart but his shot met the outstretched leg of Cech before Ashley Cole cleared.
After Lampard's 53rd-minute volley was well held by Reina, Liverpool finally broke their goalscoring hoodoo when Yossi Benayoun carved out a chance for Torres.
The Spaniard collected the ball in his stride just inside the penalty area before sliding it beyond the exposed Cech to make it 2-2 on aggregate - the 64th-minute effort was Chelsea's first at Stamford Bridge in nine games under Benitez.
Liverpool were now unrecognisable from the insipid team of the first-half.
They were pulling Chelsea apart in midfield and the home side were looking decidedly nervy for the first time in the game.
But Chelsea rallied and a fine run by Essien ended when he found the side-netting.
Both sides sought a winner - but the 90 minutes ended all-square and the contest went into extra-time.
Liverpool almost snatched the lead within minutes of the restart but Hyypia's header fell wide of the post with Cech beaten.
Chelsea then thought they had done enough when Essien sent a 20-yard effort into the net - but it was rightly disallowed for offside.
However, in the 98th minute, Ballack was brought down by Hyypia inside the box and referee Roberto Rosetti pointed to the spot.
Lampard kept his composure to send Reina the wrong way and was in tears as he celebrated with his team-mates.
Worse was to come for Liverpool when substitute Nicolas Anelka got free on the right and pulled the ball back for Drogba to fire under Reina.
An error from Cech gifted Babel a late goal but Chelsea held on to reach their first Champions League final.
