Their second leg ended 1-0 after extra-time, with the only goal coming from Danish defender Daniel Agger after 22 minutes.
With the tie locked in a 1-1 stalemate after Chelsea's 1-0 win at Stamford Bridge [ Images ] last week, the stage was set for the first penalty shootout at the semi-final stage since the Champions League replaced the old European Cup in 1992.
Liverpool won it -- their 10th win in 11 shootouts in various competitions down the years -- to eliminate Chelsea at this stage for the second time in three seasons.
The victory brought a rebuke for Chelsea manager Jose Mourinho from Liverpool skipper Steven Gerrard [ Images ], who lifted the European Cup when Liverpool beat AC Milan [ Images ] on penalties in 2005.
In the build-up to the tie Mourinho had said Liverpool were not a big club and Gerrard replied: "He makes us laugh now and then. He showed us a bit of disrespect calling Liverpool a little club. It's not bad for a little club to be in two finals in three years."
The only goal of a nerve-wracking 120 minutes came following a cleverly-taken free-kick from Gerrard. He sent a hard low cross towards the edge of the Chelsea penalty area rather than an expected high ball to the centre of it.
Agger played his part perfectly, sweeping in a well-struck shot that swerved just inside the post and into the Chelsea net out of the reach of goalkeeper Petr Cech [ Images ].
Liverpool coach Rafa Benitez [ Images ] told ITV Sports afterwards: "Every player and every supporter was a hero tonight. The team all worked very hard -- against a very good team" "I was confident in the players (for the penalties). They like to practice penalties every day after training."
An ashen-looking Mourinho said: "There is little to say. This is a moment where everyone has to be strong. The players have a lot of reasons to be proud of themselves.
"We were the best team today, even against a team playing only in the Champions League. Football is like this, we have to be strong to face it."
Boudewijn Zenden, Xabi Alonso [ Images ], Gerrard and Dirk Kuyt [ Images ] all converted their penalties for Liverpool while goalkeeper Pepe Reina [ Images ] saved penalties by Chelsea's Arjen Robben [ Images ] and Geremi to send Liverpool through to the seventh European Cup final in their history against either Manchester United [ Images ] or AC Milan in Athens on May 23.
Chances were few and far between for both sides with Peter Crouch seeing a header saved by Cech's feet on the line after 55 minutes and Dirk Kuyt heading against the Chelsea bar after 59 minutes.
At the other end Didier Drogba [ Images ] drew a fine save from Pepe Reina after 32 minutes.
Kuyt had a second goal ruled out for offside in extra time, but scored the final penalty to give Liverpool their 4-1 winning margin.
Chelsea, looking for a goal that would all but kill the tie began with an all-Ivorian strike force of Didier Drogba and Salomon Kalou [ Images ], while Liverpool captain Steven Gerrard started in his preferred central midfield role.
Liverpool took the game to Chelsea and made good use of the height of towering striker Peter Crouch and scored from their first scoring chance with Agger putting them in front from their well-worked move.
Joe Cole [ Images ] conceded a free kick on the left and Gerrard, instead on lifting the ball high into the area, squared it low for Agger to curve a low first-time shot just inside the post and wide of Cech into the back of the Chelsea net.
The goal, which looked as if it had come straight from Liverpool's training pitch, roused Chelsea from their lethargy and it took a good block by Reds keeper Jose Reina to stop Drogba's angled shot on the run after 32 minutes.
Michael Essien [ Images ] might also have grabbed an equaliser, but the Ghanaian midfielder-turned-defender's effort drifted wide of the target after a nod-on by Drogba.
Liverpool's Dutch striker Kuyt was no luckier a few minutes later when he sent a header past Cech -- only to see the ball crack against the crossbar and bounce to safety.
The Anfield crowd, who had been belting out their passionate support since kickoff, made sure the atmosphere stayed electric as Liverpool turned the screw on the visitors.
Pennant had a shot charged down in the area before making way for Spaniard Xabi Alonso, while a cautious Chelsea seemed more intent on not conceding than trying to score as the 90 minutes drew to a close.
Liverpool always looked the hungrier of the two sides, underlined by Zenden's fierce 25-metre shot from the left flank which Cech only gathered at the second attempt. But there was no breaking the deadlock in regular playing time over the two legs, sending the game into extra time and ultimately to penalties.