The victory marked the first time in a decade that Azarenka had made it to the last four at Melbourne Park and she will make her first appearance in a major semi-final since the US Open in 2020 where she went on to lose in the title clash.
"Well, it hurts to beat her because I always want her to do well, but the same time I know I have to play my best tennis," Azarenka said of her friend and practice partner Pegula.
"She's been playing amazing, very consistent and I knew from the first point I have to bring it.
"We had so many rallies and I wanted to try to stay there, take opportunities because she was going to take everything if I don't try to win myself and I'm very proud that I executed my game plan really well."
Azarenka, the last woman to defend the Australian Open title after her 2013 triumph, played superbly to race into a 3-0 lead over American Pegula in the first set before the highest seed left in the women's draw finally held serve.
Pegula found her rhythm playing closer to the baseline and controlling the rallies to break back, but Belarusian Azarenka found another gear to move ahead in the contest before both players failed to hold serve in the next.
Former world number one Azarenka took the decisive lead, however, and closed out the match to set up a clash with Wimbledon winner Elena Rybakina (23).
"It's so amazing to be in the semi-final of another Grand Slam," Azarenka said. "I felt especially last year my tennis wasn't bad but I wasn't really mentally there to go out there.
"I played with a lot of fear, with a lot of anxiety and it really was difficult to be brave and to make the right choices in an important moment when you feel anxious, when you feel hesitant.
"I worked a lot on my mindset, challenging myself on things that I wouldn't really do before and try to push myself forward.
"Because when you achieved great success, sometimes you become conservative and you're a bit more hesitant to try new things. This off-season I was like I'll just be open-minded trying new things and put my head down and work hard."
Wimbledon champion Rybakina also booked her place in the Melbourne Park semi-finals for the first time, the Kazakh 22nd seed beat Jelena Ostapenko (25) 6-2 6-4 in a match that was played under the roof after a rain shower halted play.
"I'm super happy to be in the semi-finals for the first time," said Rybakina. "Of course, I was nervous, particularly in the last game, but I'm happy I managed my emotions. I played really well today."
Having started her campaign on one of the outer courts at this year's championship, Rybakina was every bit the star on Rod Laver Arena with a dominant display in which she sent down 11 aces to quell 2017 Roland Garros champion Ostapenko.
