The Spaniard, who missed the tournament last year, saved three set points in the crucial third on his way to a 3-6 7-6 7-6 6-2 victory in three hours and 37 minutes at Rod Laver Arena.
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The 22-year-old Bulgarian showcased the power, court coverage and booming serve that tennis pundits have suggested could take him to the top of the game as he tested Nadal, although he was unable to capitalise at crucial moments of the match.
He held two set points in the third only for Nadal to seize the advantage and clinch the tie-break 9-7, then the Spanish left-hander hammered the nail in the coffin of Dimitrov's hopes when he broke in the second game of the fourth.
Nadal held serve to take a 3-0 lead that he never looked like relinquishing and completed victory to set up a mouth-watering clash against either Roger Federer or Andy Murray for a place in the final.