The defending champion at the Foro Italico, Djokovic beat Federer 6-2, 7-6 (4). Five-time winner Nadal eliminated fellow Spaniard David Ferrer 7-6 (6), 6-0 in the other semifinal.
"We're both physically fit and fresh and ready to deliver our best tomorrow," Djokovic said. "We have a great rivalry. He's the player I've played the most against in my career and there are no secrets. It's going to be a good fight. It would be good for both of us to get that trophy before Paris."
The French Open, the only Grand Slam Djokovic didn't win last year, begins next weekend.
Djokovic beat Nadal in last year's final, and defeated the Spaniard in an epic Australian Open final in January, which at 5 hours, 53 minutes was the longest Grand Slam championship match. Nadal easily won their last meeting in the Monte Carlo final last month when Djokovic was mourning the death of his grandfather.
"It's going to be an interesting one, especially after what happened in Monaco," said Federer, who moved past Nadal to No. 2 this week. "Djokovic has pressure to defend his points and his title and Nadal wants to close the points gap with me."
Nadal beat Djokovic in the 2009 Rome final and holds a 17-14 career edge over the Serb.
"Playing Rafa is always a challenge. He's the best player ever on this surface. But after 2011, I know I can win now," Djokovic said. "I need to step into the court and take chances and not allow him to move me around."
Against Federer, Djokovic was cruising until he served for the match at 5-4 in the second. Federer saved a match point with a blazing inside-out forehand crosscourt winner, and then converted his first break point of the match to draw even.
"I knew that a player with his capabilities could come back into the match at any point, and that was the case at 5-4," Djokovic said.
However, even with the sellout crowd of 10,500 doing their best to encourage Federer, the 16-time Grand Slam winner made a series of costly groundstroke errors in the tiebreaker to hand Djokovic the win.
In all, Federer committed more than twice as many unforced errors as Djokovic, 42-20.
"Overall, I don't think I was playing good enough," said Federer, who won the Madrid Open last week. "Plus, I was a bit tired. I've been playing a lot lately."
Djokovic called it his "best match on clay this year."
"I felt really good on the court," he said. "I was returning really well, and always making him play one extra shot."
Nadal struggled with his backhand but overcame a difficult first set to post his 11th consecutive win on clay over Ferrer.
Nadal won clay titles in Barcelona and Monte Carlo this year before losing in the third round on an experimental blue surface in Madrid last week.
"(It's the) best thing possible (for me) after a fantastic time in Barcelona and Monte Carlo. To keep playing in (a) clay tournament and then in the final without losing a set is something fantastic," Nadal said. "We can forget the tournament of Madrid -- that wasn't clay."
With Ferrer picking on his backhand and winning most of the long rallies early, Nadal needed to save seven break points to hold his opening service game.
"(In) the first set it was unbelievable how David set the (tone) with amazing rhythm and aggressive (shots)," Nadal said. "The thing that I tried to do was to keep the score close."
The first set was decided by just two key points. Early on in the tiebreaker, Ferrer was up a mini-break and in control of a point when he attempted a drop shot that landed in the net. Nadal then took control when he ran down a difficult half volley from Ferrer.
Of Nadal's 20 unforced errors in the first, 15 were off backhands.
On the women's side, Maria Sharapova defeated rising German player Angelique Kerber 6-3, 6-4 and will defend her title against French Open champion Li Na. The Chinese player advanced after Serena Williams withdrew shortly before their semifinal with a lower back injury.
Williams said the back problem affected her game earlier this week. But she said she'll be ready for Roland Garros.
"It was feeling a little stiff and I don't think this is the right moment to force (it)," she said. "I just want to relax and get ready for the next few months. ... This is a good week to get better and I'm confident that I'll be 100 percent."
Several other players are also nursing injuries.
Victoria Azarenka withdrew with a right shoulder injury before her third-round match. Wimbledon champion Petra Kvitova was bothered by an abdominal injury during a quarterfinal loss to Kerber. And Italy's Flavia Pennetta retired with a right wrist injury while trailing Williams 4-0 on Friday.
On the men's side, fourth-ranked Andy Murray skipped last week's Madrid Open with a back problem and said it was still affecting him after a three-set loss to Richard Gasquet in the third round this week.
Information from The Associated Press contributed to this report.