Taylor had been undefeated since 2007 in the prestigious World Matchplay and was bidding to win the title for an eighth successive year and a 16th time in total after battling through to the last four.
However, Wade - who went on to win the title in 2007 after Terry Jenkins had knocked out Taylor - held his nerve to claim a memorable triumph as he put himself into the final in Blackpool for a sixth time.
Wade had levelled twice after trailing 3-1 and 7-5 before moving into a lead he would never relinquish at 13-10 and 16-12 before holding off Taylor's late rally to end his 38-game winning record on the Winter Gardens stage.
Finishes of tops, double 18 and double seven gave Taylor three of the first four legs, and after Wade hit back with a 120 finish an outstanding ten-darter put the reigning champion 4-2 up.
Taylor then opened leg seven with 180 and 140, but a 168 score from Wade applied the pressure before he punished a miss at double 13 by hitting tops for a 13-darter to hit back.
Taylor produced a fine 12-darter to take a 5-3 lead, but Wade responded with a 180 in a 14-darter before breaking throw on tops - after his opponent missed the same bed - to level.
Taylor took the next two with the aid of 180s for a 7-5 cushion, but the left-hander again hit back as he took the next four legs - punishing missed doubles from the Stoke great in three - to move 9-7 up, with 76 and 64 combinations proving key in that run.
Wade then missed two darts to extend his advantage as Taylor finished 97 with a single 19, double 19 and double top checkout, and a 14-darter which included a second 177 opening of the game saw him level at nine-all.
The next two were also traded before Taylor's miss at tops in the 21st leg allowed Wade in on the same bed to edge 11-10 up, and he then finished 84 and 65 to pull three legs clear.
Taylor kicked off the next with a 174 score as he replied with an 11-darter before the duo traded 180s as double ten moved Wade 14-11 up, only for the left-hander to miss the bull for a 161 checkout as his opponent took leg 26.
Wade, though, won the next two with a 13-darter and double six, after a 177 score left 24, as he moved to the brink of victory at 16-12.
The tension rose as he missed eight match darts at doubles in leg 29, with Taylor staying in the hunt with double 16 before finishing double six to pull back to 16-14.
Wade, though, regained his composure with scores of 140, 174 and 140 to pull clear in the next leg and finished tops for a 12-darter to complete a famous triumph.
"Phil's beaten me so many times so I'm a bit numb, but I'm really happy," said Wade. "I didn't expect Phil to play like that but I've beaten him and can look forward to the final.
"I've not played my best but I caught a man when he is struggling, and Phil doesn't normally struggle here so I'm very grateful; it's a big weight off my shoulders.
"He didn't score or finish like he normally would; in patches he did but I stuck with him until ten-all and it seemed to break him a little bit.
"I've got the self-belief at the moment. I've had hidings from Phil, been up there before and he's punched me all around the stage and normally he beats me and beats me, and this time he didn't have any big punches in him.
"I came here tonight and had a good idea of what was going to happen, and I thought I was going to play much better. I hit probably six finishes with my last darts.
"I missed a few match darts and hoped I hadn't messed it up, but it's hard to beat a great player like Phil Taylor - what he's done in darts will go down in history."
Wade will be appearing in his sixth World Matchplay final on Sunday night, and added: "I wanted to play Phil Taylor this week and Michael too, because I'm feeling good and I want to play against the best."
Van Gerwen booked his place in the final for a second successive year with a 17-12 win over Wright in their last four contest, as he seeks to go one step further and claim the title to erase the memories of his loss to Taylor 12 months ago.
Van Gerwen has since claimed major ranking titles at the World Grand Prix, European Championship, and UK Open, and continued his challenge for a first World Matchplay win with a dominant display against Wright.
The Scot shared the opening six legs in a high-quality start, but was blown away by a five-leg burst as the Dutchman pulled into a lead which he would never lose.
After double 18 gave Wright the opener, van Gerwen hit two 180s in an 11-darter to level, the Scot finished 86 on the bull for a 12-darter and the world number one finished 90 on double ten to level.
Wright then traded 180s with van Gerwen as a 14-darter moved him 3-2 up, but the Dutchman levelled with a 104 checkout - after his opponent missed the bull - before breaking with a 13-darter to move 4-3 up.
Van Gerwen then finished 72, 90 and 56 as the opened up a 7-3 cushion before Wright took two of the next three to pull back to 8-5.
Tops from van Gerwen punished Wright in the next, before the number five seed produced an outstanding 161 checkout to hit back to 9-6 - only for his rival to finish double eight and double ten to move five legs clear.
Wright won two of the next three to hit back to 12-8, and after van Gerwen finished double ten and double one for a 14-8 lead, his revival continued with double 19, double 12 and an 11-darter to reduce the gap to just three legs.
The next, though, went to van Gerwen as he edged out to 15-11, with the pair trading 180 as Wright finished a second 11-darter in three legs to win his 12th leg of the contest.
However, van Gerwen fired in his tenth 180 in a 13-darter to move to the brink of victory, and sealed his spot in the final with a stunning ten-dart finish which featured scores of 174 and 171.
"This is fantastic for me," said van Gerwen. "It was a great performance and though I can do better than this, but I really enjoyed this win.
"Peter is a good player but today he wasn't as good in his doubles and his finishes at the right moments, and I'm glad I did. Going 7-2 up made the game and after that deep inside my heart I knew I was not going to lose the game.
"It's a fantastic feeling and I hope I can carry this on for the final. I'm feeling really good."
Van Gerwen had been left in tears following last year's defeat to Taylor, but will now focus on a different opponent - Wade - in this decider.
"In one way it's a bonus but I also wanted to play Phil because revenge would be nice!" he said. "I'm a big favourite against James but he played phenomenal darts to beat Phil and I have to prepare myself as well as possible because he's a fantastic player.
"I want to use my confidence in the next game and do my own thing and try to beat him. I've never won this tournament and he has, so it's my turn!
"It would be really special to win and I hope I can see myself holding the trophy tomorrow night."
Van Gerwen is the 1/4 favourite with sponsors BetVictor to win Sunday's final, with Wade rated at 100/30 having been a 28/1 chance pre-tournament, while a nine-dart finish in the final is 12/1.
BetVictor World Matchplay
Saturday July 25
Phil Taylor 14-17 James Wade
Michael van Gerwen 17-12 Peter Wright
Sunday July 26 (7pm)
Michael van Gerwen v James Wade
Best of 35 legs
Phil Taylor v James Wade
1-0 - Taylor breaks throw immediately, finishing 53 on tops.
1-1 - Wade initially misses tops to finish 101, but Taylor is off-target with two darts at double 16 to allow the left-hander back in on double ten to break back and level.
2-1 - Wade misses two darts at tops, and Taylor capitalises for another break of throw on double 18.
3-1 - Double seven sees Taylor open up a two-leg lead.
3-2 - Taylor is unable to finish 90, and Wade takes out 120 on tops to hit back.
4-2 - Taylor produces a brilliant ten-darter, scoring 177, 140 and 168 before pinning double eight to regain a two-leg lead.
4-3 - Taylor opens with 180 and 140, but misses double 13 to finish 81 to allow Wade to follow a superb 168 set-up with tops for a 13-darter.
5-3 - Taylor lands another maximum as he completes a 12-darter on double 16.
5-4 - Wade posts his first 180 before finishing double ten for a 14-darter.
5-5 - Taylor misses tops for a 106 checkout, allowing Wade in to hit the same bed to break throw and level.
6-5 - Taylor breaks throw to regain the lead, landing a 180 and finishing 96 on double 18.
7-5 - The reigning champion lands his fifth 180 before taking out double four to move two legs clear again.
7-6 - Wade initially misses double 12, but returns on double six to hit back.
7-7 - Taylor misses double 14 and double seven to finish 88, with Wade stepping in to break throw and level by finishing 76 in two clinical darts.
7-8 - Wade fires in his second 180 of the game, and when Taylor wires double five to take out 89, the left-hander finishes 64 on tops to move ahead for the first time.
7-9 - Both players land 180s, with Taylor being first to a finish only to miss three darts at doubles across two visits, allowing Wade to finish double three to move two legs clear with another break of throw.
8-9 - Wade misses double top and ten to move three legs clear, and Taylor steps in to finish 97 with a classy single 19, double 19, double top combination.
9-9 - Taylor opens with another 177 before finishing double eight for a 14-darter to square the contest.
9-10 - Wade lands his fourth 180 before hitting tops to edge back in front.
10-10 - Taylor levels a tight contest by posting double 16.
10-11 - Taylor is unable to land a second double top to finish 100, and Wade steps in to hit the bed to move back ahead.
10-12 - Wade breaks throw for a fifth time in the game, taking out 84 on double 11 for a superb 12-darter.
10-13 - Taylor is unable to finish 139, and Wade steps in to finish 65 on double four as he moves three legs clear.
11-13 - Taylor kicks off with a 174 and adds scores of 140 and 122 before finishing 65 on tops for an 11-darter.
11-14 - Wade's 180 is followed by a maximum from Taylor, who is unable to finish 122 to break throw as the 2007 champion returns on double ten.
12-14 - Taylor opens once more with a 180 and adds scores of 134 and 137, with a miss at double 16 then allowing Wade a shot at 161 - only for the left-hander to wire the bull for a 161 checkout as the Stoke ace returns on double eight to hit back.
12-15 - Wade moves two legs away from victory - which would end Taylor's amazing reign in Blackpool - by finishing tops for a 13-darter.
12-16 - Wade scores 177 to leave 24 before finishing double six to move one leg away from the win.
13-16 - Wade is first to a finish, but misses eight match darts across three visits as Taylor scrambles in double 16 to keep his title hopes alive.
14-16 - Double six for a 14-darter sees Taylor continue his fightback.
14-17 - Wade kicks off with 140 and 174 before ending Taylor's amazing reign at the Winter Gardens by hitting double top for a 12-darter.
Michael van Gerwen v Peter Wright
0-1 - Double 18 gives Wright the game's opening leg.
1-1 - van Gerwen fires in six perfect darts with two 180s before finishing 76 for an 11-darter to level.
1-2 - Both players hit 180s before Wright finishes 86 on the bull for a 12-dart leg.
2-2 - van Gerwen takes out 90 on double ten to hit back again.
2-3 - The pair trade 180s again before Wright finishes a 14-darter to edge back in front.
3-3 - Wright misses the bull to finish 121 for a break of throw, and van Gerwen takes out 104 to level.
4-3 - The pair swap maximums for a third time in the game as van Gerwen breaks for the first time on double 14 for a 13-darter, punishing a miss at double nine from Wright.
5-3 - Wright opens with a maximum, but van Gerwen finishes 72 on double six.
6-3 - The Dutchman's charge continues as he finishes 90 on double ten for a second time in the game.
7-3 - van Gerwen takes out 56 on tops to claim a fifth successive leg.
7-4 - Double 16 sees Wright hit back.
8-4 - van Gerwen restores a four-leg cushion on tops.
8-5 - Double ten for Wright sees him claim a fifth leg.
9-5 - Wright misses his chance to break as van Gerwen steps in on tops.
9-6 - A sensational 161 checkout from Wright sees him close the gap to three legs.
10-6 - Wright misses double 18 for a 153 checkout, and van Gerwen pins double eight to capitalise.
11-6 - van Gerwen hits a 180 and double ten to move five legs clear.
11-7 - Four missed doubles from the Dutchman allow Wright to hit back on double eight.
12-7 - van Gerwen finishes a 14-darter on double eight.
12-8 - Wright lands a 180 before finishing 81 on the bull for a 12-darter.
13-8 - Double ten sees van Gerwen regain his edge.
14-8 - van Gerwen takes the leg on double one to move three legs away from the final.
14-9 - Wright hits back with a 180 and double 19.
14-10 - Double 12 sees Wright break throw.
14-11 - The pair trade 180s before Wright claims his third successive leg with an 11-darter.
15-11 - Wright lands a 180, but van Gerwen takes out double four to edge closer to victory.
15-12 - Both players land 180s before Wright finishes double 12 to hit back.
16-12 - van Gerwen hits his tenth maximum before double 16 moves him to the brink of victory.
17-12 - The Dutchman seals victory in brilliant fashion with an ten-dart finish, scoring 140, 174 and 171 to set up double eight as he moves into the final for a second successive year.