they will meet India on Sunday.
Lanka, backed by a packed house of raucous supporters, completely outplayed the Australians at the Premadasa Stadium on Friday night.
The Australians appeared lost and did not know what had hit them.
But the world champions had been let down badly by their batsmen, who could manage a mere 162 after Ricky Ponting had won a good toss and elected to bat on the slow surface that afforded a lot of turn to the spinners.
The Sri Lankan batsmen hammered the runs in only 40 overs with captain Jayasuriya leading the way with an attacking knock of 42. Kumar Sangakarra contributed 48 and Marvan Attapattu 51.
The Australians also erred in reading the wicket and packed their side with four seam bowlers when they should ideally have played the extra spinner in Nathan Hauritz. Brett Lee and Shane Watson had absolutely no role to play in the match.
They had expected to put up a fighting performance in the semi-final but the match turned out to be entirely one-sided with Sri Lanka dominating the whole game perhaps with the exception of the first five overs at the start of play.
Openers Adam Gilchrist and Matthew Hayden started in a cavalier fashion, blasting 46 runs from the first five overs. But the script changed dramatically after that.
Sanath Jayasuriya introduced spin and his move to bring on Aravinda de Silva proved to be a masterstroke as the veteran came up with dream figures of one for 16 from his full quota of ten overs. Muthiah Muralitharan was at his vicious best on this helpful track. Kumar Dharmasena and Jayasuriya were equally difficult to hit and Australia were bowled out for a paltry 162 in 48.3 overs.
It is not often that Shane Warne tops the Australian batting card but he did that with a responsible knock of 36. Adam Gilchrist had blazed of to 31 before the spinners were pressed into service. Damien Martyn contributed 28 and Brett Lee got some runs towards the end.
But 162 was hardly a score that was going to test the Sri Lankans. Warne played his part well but he had no support at the other end.
The Sri Lankan outfielding was also excellent with Lehmann and Martyn falling to direct hits from Jayasuriya and Russell Arnold respectively.
De Silva almost took the ball from Jayasuriya and asked to be brought on. It was the ideal move as he bowled Hayden in his first over.
Ponting said after the match he was surprised to the see the ball turning in the seventh over of the day.
"But we should have at least scored 230. That would have given us a very good chance. But Sri Lanka outplayed us in all areas of the game today," said Ponting.
Jayasuriya praised man-of-the-match De Silva saying his ten over spell in which he conceded only 16 runs was the turning point of the match.
"Aravinda came on to bowl at a very difficult time in the match when the Australian openers were on top. But his showing today was simply wonderful," he said.
Australia: Ricky Ponting (captain), Michael Bevan, Jason Gillespie, Adam Gilchrist, Matthew Hayden, Brett Lee, Darren Lehmann, Damien Martyn, Glenn McGrath, Shane Warne, Shane Watson. 12th man: Nathan Hauritz.
Sri Lanka: Sanath Jayasuriya (captain), Russel Arnold, Marvan Atapattu, Upul Chandana, Aravinda de Silva, Kumar Dharmasena, Pulasthi Gunaratne, Mahela Jayawardene, Muttiah Muralitharan, Kumar Sangakkara, Chaminda Vaas. 12th man: Tillekeratne Dilshan.
Umpires: Steve Bucknor and David Orchard.
Third umpire: Rudi Koertzen.
Fourth umpire: Srinivas Venkataraghavan.
Match referee: Wasim Raja.