Lee Jeong-hyeop gave the lead with a 20th minute header and defender Kim Young-gwon lashed the second into the net five minutes after the break as the South Koreans reached the final for the first time since 1988.
Iraq emotionally and physically drained by their dramatic quarter-final victory over Iran last week, played with plenty of passion but were unable to become the first side to breach the Korean defence in five matches in Australia.
"This semi-final was crucial for us to get to the final, we know we have not won this competition for many years," said South Korean midfielder Nam Tae-hee, who was named Man of the Match.
"All the players were together, firm and united, and that's what gave us the win today."
South Korea had looked the most likely to score in a cagey opening to the match with Son Heung-min, the two-goal hero of their quarter-final victory over Uzbekistan, drawing a fingertip save out of Jalal Hassan with a long-range effort.
A minute later and the Koreans were in front, Kim Jin-su curling a free kick into the box and Lee rising above the Iraqi defence to head down and into the net.
Iraq skipper Younis Mahmoud was making his presence felt up front but South Korea are not a side to be bullied at the back and he was more often than not battling alone in the first half.
The persistent rain that fell on Sydney all day was not able to dampen the spirits of a noisy crowd of just over 36,000, the South Koreans at one end with inflatable batons and the horde of Iraqis at the other accompanied by drums and whistles.
The Koreans had more to shout about but Iraq gave their supporters a lift with a flurry of attacks just before the break when winger Amjed Kalaf's raking drive forced Kim Jin-hyeon to get down low to push the ball across his goal.