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Early on, the match was riddled with errors as both women lost their opening service games to-30 before Li secured the first hold in the third.
Azarenka couldn't match her opponent by holding but did break back instantly, finally getting some depth on her groundstrokes to unsettle Li.
The Chinese was brutal when returning, however, and she ensured Azarenka wouldn't get her first hold of the match by bullying the serve coming towards her.
Sixth-seed Li then produced the most efficient service game by a distance, holding to-love and taking the game with a pinpoint off-forehand into the corner.
The crowd were fully behind Li but Azarenka managed to hold serve for the first time in the next, forcing her opponent to serve out the opener.
Her groundstrokes went missing as she hit three unforced errors off the backhand wing to gift the Belarusian three break-back points. She saved the first with a cross-court winner but again dumped a backhand into the net to allow Azarenka to pull the set back to 4-5.
Li found a return winner at 30-30 to earn a set point but it was swatted away by Azarenka's depth. The number one seed then stooped to hit a cross-court pass that even the Li-favouring crowd inside the Rod Laver Arena applauded.
Li stopped Azarenka holding with some more accurate returning but hit long her return on a second set point. She soon claimed the set at the third time of asking when Azarenka served a double fault.
The defending champion began the second by instantly breaking Li's serve and just about held on to her own to move 2-0 clear in the set.
Azarenka was in danger of pulling way clear in the second as she earned a double break but surrendered her serve in the next with some mistimed forehands.
The next game was poised at 30-30 when Azarenka wrongfooted Li and the Chinese rolled her left ankle. She immediately called for a medical timeout and her continuation was in doubt.
Only once in the Open era has a woman retired in a Grand Slam final - Justine Henin in 2006's Melbourne final - and Li wasn't to become the second, returning to court with some ankle strapping and blasting two straight winners to hold serve.
Li's injury didn't seem to be affecting her movement greatly as she earned three break-back points in the next. Azarenka reeled off six straight points though, maintaining her two-game advantage.
Li would break at the next opportunity to level the second set at 4-4 and move within two games of victory.
Back came Azarenka, snatching the 12th break of the match and this time she held serve to-love to claim the second set 6-4 and send the match into a deciding third set.
The Belarusian broke in the opening game of the third but gifted Li the break back by again double faulting at a crucial time.
Li sealed her service game with an ace to edge 2-1 ahead before there had to be a 10-minute delay in the match for Melbourne's celebratory fireworks for Australia Day.
On the first point after the fireworks Li again rolled her ankle and also hit her head against the court on the fall down. The trainer ran onto court but after another medical timeout, Li soldiered on.
She held serve to level the set but was broken in the fifth game. Azarenka held to-love in the next to edge ever closer to victory.
Li had a break-back point at 3-4 down but couldn't take it and Azarenka finished the match off by breaking the Chinese's serve for a ninth time.
The victory ensures that Azarenka will retain her status as world number one.