After Alvaro Morata's defeat by Gianluigi and Dani Olmo, Jorginho coolly kicked the decisive goal past Spain's keeper Unai Sin after Jorginho had failed to score.
Spain's twin misses saved Manuel Locatelli. Simon saved his strike with the first kick. Italy's substitutes, coaches and staff then poured onto the pitch to celebrate the goal in front of their cheering supporters.
Italy will face either England or Denmark in Sunday’s final at Wembley. This is their first showpiece since they were beaten 4-0 by Spain in Euro 2012. They are hoping to win the tournament for first time since 1968.
Roberto Mancini's team took the lead after an hour of sensational curling from Federico Chiesa. This was followed by a counter-attack that began with Donnarumma catching a Spain crossing and rolling it out.
Morata scored for Spain in 10 minutes, calmly sliding into the bottom corner. He had sprung forward and exchanged a one-two.
Spain seemed more likely to win in the final minutes of extra time, but couldn't manage a second shootout win against Switzerland after winning in the quarter-finals.
Italy won the Euro 2008 quarter-finals against Spain and the Euro 2012 final against Spain. It also completed their second consecutive European Championship win over the Spaniards, following their 2-0 victory in the last 16 Euro 2016.
Wembley's capacity was increased to 60,000. Although coronavirus restrictions prohibited fans from traveling abroad, expatriate communities from both countries packed each other behind the goal to create a fiery atmosphere and increase the feeling of occasion between these two giants of international football.
It's a shame. Our tournament was not to end today, but we wanted it to continue on Sunday. We won the title. After the match, Sergio Busquets, Spain's midfielder, said that it was not to be.
"Everyone thought Italy was a favourite, but we proved that we were better than Italy. It's a shame. It was unfair for us to be left behind. We can only thank Italy and keep going on our way."
After the results were announced, Chiesa was happy.
"Spain was great, they have stars players, but we fought till the end and we did it," stated Chiesa from Italy.
"When Locatelli missed his first penalty, everyone calmly said we can do it. At the end, our group helped us in this moment."
Italy's defender Leonardo Bonucci stated that Spain was the most difficult challenge in his career.
"It was one of the most difficult games I've ever played. Bonucci stated that while I commend Spain for their efforts, Italy once again showed determination, heart, and the ability to persevere through difficult times.
"Now, there's one centimetre more. It's amazing what we're doing. We will be back in five days, and we need to have the same attitude as 50 years ago to bring home the trophy.
After the fight, a Chiesa was emotional and hailed the result.
He said, "I can't describe my emotions by words, it wasn't an easy match, Spain were fantastic tonight, but we will be back here on the 11th July for our final,"
"Spain was great, they have stars players but we fought till the end and we won. Everyone was calm when [ Manual] Locatelli missed a penalty. Our group then helped us to the end.