The world number two had lost just nine games on her march into the last four, but she came up against an inspired performance from Chinese star Li.
The world number six battered the Russian into a 6-2 6-2 submission, and Sharapova admitted she was not good enough to make it to an eighth grand slam final.
"I think she played a really great match," said Sharapova. "She was certainly much more aggressive than I was, dictating the play. I was always on the defence.
"When I had my opportunities and break points in games that went to deuce, I don't think any of them really went my way today."
Sharapova was frustrated to comeup short in what was her first tough match of the tournament in Melbourne.
"When I go into any match, I'm trying to win with the best scoreline I can. That's my goal," she said. "Like I mentioned before, if I'm tested, I have to pull through it.
"Then, yes, that's great if I win with a good scoreline, move on to the next one, try to do the same thing. Today I felt like I had my fair share of opportunities. It's not like they weren't there. I just couldn't take them today."
2011 French Open champion and former Melbourne finalist Li maintained her pace throughout the 90-minute masterclass, and hopes to go one better than her last Melbourne final
"I always play well here," said Li. "I'm really hungry for the title. I think this time should be maybe a different story or maybe the same story. But I will try."
"At beginning of the match I was nervous. I was happy to be back in the semis again, but for some reason I really wanted to win the match. I don't know what happened today. I just come to the court, feeling like, 'Okay, just do it'."