The German side, who will play in their second final after winning the competition in 1997, survived early pressure from a fired-up Real in the last-four second leg clash before wasting several chances to kill off the home team.
Real, chasing the 10th European crown that has eluded them since 2002, looked down and out before substitute Karim Benzema struck in the 83rd minute and Sergio Ramos smashed in a second goal five minutes later to given Jose Mourinho's side hope.
With the raucous crowd on its feet and willing their team on, the Real players desperately sought the goal that would have taken them through but Dortmund held out to set up a clash with Bundesliga rivals Bayern Munich or Barcelona.
Bayern have a 4-0 advantage over the La Liga leaders after their stunning victory in Munich last week.
Dortmund's success put them into their first European final since the 2001/02 season, when they lost the UEFA Cup showpiece to Feyenoord, while Real are the only team to be eliminated in the Champions League semi-finals for three years in a row.
"It was tight at the end," Dortmund coach Jurgen Klopp said in a television interview.
"We had our huge chances before that. Had we scored then it would have been over. Overall we played too little football but we won 4-3 over two games and deserve to be in the final."
Real's reverse is also a huge setback for their charismatic coach Mourinho, who was trying to become the first man to win the Champions League with three different clubs after triumphs with Porto in 2004 and Inter Milan in 2010.
It is the fifth time the Portuguese has been knocked out in the last four of Europe's elite club competition in seven semi-final attempts.
In typically outspoken fashion, Mourinho complained that Dortmund defender Mats Hummels should have been sent off for handball in the second half but praised his players for "giving their all".
"We had opportunities to score much earlier and then we obviously would have had a better chance," Mourinho, who has refused to commit to staying at Real beyond the end of this season, told Spanish TV.
"Near the end we almost got there but almost does not exist. Either you make it or you don't and we didn't make it," he added.
"We have had three strong seasons with almost, almost, almost. I hope that in the future, and obviously that it happens soon, we can leave the almost behind and get to the final."
FIRED UP
With Spanish King Juan Carlos watching from the VIP tribune and chants of "Yes we can!" echoing around Real's giant arena, the home supporters unveiled an enormous mosaic depicting the Champions League trophy before kick-off.
The electric atmosphere appeared to energise the players and Real took the game to Dortmund early on, Gonzalo Higuain drawing a smart save from Roman Weidenfeller in the fourth minute.
Dortmund looked nervous but were also managing to get forward and Robert Lewandowski, who scored all four of their goals in last week's 4-1 first-leg victory, volleyed st
