Williams had been seeking to become the first women's champion to defend her Australian title since Jennifer Capriati in 2002.
"It was an unbelievable match and I'm still shaking," Jankovic said in a courtside interview after the 6-3 6-4 victory.
"I'm really so happy to be in the semis for the first time in Australia. I came here with no expectations and it is amazing to beat the defending champion.
"It doesn't happen every day." A sluggish Williams, who was unseeded when she won the tournament last year, broke the world number four in the second game of the opening quarter-final on Rod Laver Arena but then went to pieces.
Jankovic broke back immediately and held to level the score at 2-2 and the pair then engaged in a tit-for-tat contest achieving break points only for their opponent to battle back.
Both had seven opportunites each in the first set, but the seventh-seeded Williams was unable to convert any after the initial break while Jankovic took three of hers to win the first set 6-3 on Williams's service.
Jankovic then jumped out to a 2-0 lead in the second set, before the pair again engaged in breaking each other's serve.
Williams finally held at 3-3 after a game that involved six deuce points before Jankovic held in the next game after a struggle that again ebbed between deuce and advantange points.
Jankovic had the opportunity to serve for the match at 5-3 up only for Williams to bludgeon shots from all parts of the court and break back.
The drama, however, was not finished with Jankovic battling back from 40-15 down on Williams's serve to snatch the match in 99 minutes when Willams's groundstroke sailed wide.
She will now meet the winner of the quarter-final between world number one Justine Henin and fifth-seed Maria Sharapova, who play later on today.