Navas kept his nerve to slot home the decisive penalty in an incredible shoot-out which followed a tense, goalless draw in Fortaleza.
David Silva started the game, while Navas was kept in reserve as Spain looked to take a giant leap towards completing their glittering trophy collection.
Former City striker Mario Balotelli had been sent home from the tournament after picking up an injury in the defeat to Brazil at the weekend.
In keeping with the pattern of a tight first-half, Silva was quiet as the usually peerless conductors in the Spanish midfield struggled to provide service against a stubborn, well-organised Italy.
The Azzurri had a string of chances to take the lead in the opening 45 but were denied by an inspired performance from Iker Casillas in the Spain goal
...Spain v Italy...
Spain boss Vincente Del Bosque was seen laying into the world champions as they made their way out for the second half and there were signs of improvement after the break.
Silva made way for City new boy Navas after 52 minutes and the winger’s searing pace immediately had a positive impact for his side.
Despite this new attacking emphasis, as well as a couple of presentable opportunities for the former Sevilla man in front of goal, extra-time was required to separate the Euro 2012 finalists
...Spain v Italy
Xavi came closest to finding a winner for Spain with a dipping strike which Buffon had to claw onto the post after 115 minutes, while the Italian keeper was needed again to tip a good effort from the hugely impressive Navas around the post moments later.
A penalty taking masterclass was served up by both sides with their first six takes each but Bonucci was first to blink, firing high over Casillas’s crossbar, leaving Navas to cap a perfect night with his cool conversion.
La Roja now face hosts Brazil in Sunday’s final at the Maracana.
In other international news, Denis Suarez was a 74th minute substitute for Spain under-20s as they continued their fine World u20 Cup form with a 2-1 win over France.
They had already qualified for the Round of 16 but this latest victory courtesy of goals from Jese and Paco Alcacer cements their place at the top of their group.
They will face one of the four best third-place finishers from the other groups next Tuesday.
