Goals from Marco Fabian, Oribe Peralta and Javier Cortes, who had only been on the pitch two minutes when he scored, led to wild scenes of delight as Mexico clinched a place in the gold medal match back at Wembley.
Their next opponents Brazil swept South Korea aside 3-0 in front of 69,389 at Manchester United's Old Trafford stadium later on Tuesday.
Fabian summed up Mexico's feelings, saying: "This is an unforgettable moment and we are making history. But this is not over yet and we want to go for everything. We want to win the gold now."
With the Olympics being primarily an Under-23 competition with three overage players allowed, the future is looking bright for the country's next generation of footballers.
But their hopes of emulating the Japan's women's team, who reached their final by beating France at Wembley on Monday, faded as Mexico gradually took control.
Dos Santos, usually Mexico's key playmaker with three goals at the London Games so far, was strangely off-key for once and, after missing three good scoring chances in the first half, was replaced at the interval.
Japan coach Takashi Sekizuka must now lift his players for before the bronze medal playoff at Cardiff's Millennium Stadium on Friday against South Korea.
"I am very disappointed and even though we scored first we allowed Mexico to profit from our mistakes. We really wanted to go to the final, but now we will have to concentrate on the other medal," he said.
