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Federer, bidding to reach an 11th consecutive Grand Slam final, looked vulnerable from the start throwing in a couple of early errors, particularly on the backhand wing, and slumped to defeat in less than three hours.
In comparison Djokovic, who will now face unseeded French sensation Jo-Wilfried Tsonga in Sunday's final, looked calm and collected despite having crashed to a straight sets defeat the last time the two met at the US Open final in September.
Australian Open
Federer philosophical in defeat
25/01/2008 AT 14:10
Indeed it was the 20-year-old Serb who made the early inroads against serve holding a break point in the fourth game. But, as he had done all tournament, Federer found a way to stick with Djokovic before snatching a break in the seventh game, against the run of play.
Federer held to enforce the break and looked to be cruising towards a one set lead before throwing in an uncharacteristically edgy game to gift Djokovic the break back by dumping a forehand into the bottom of the net.
While Djokovic played the all-court game better than Federer throughout the match, it was the serve that was the most important aspect, with 13 aces and yet more service winners regularly digging the world number three out of trouble.
Federer dropped the first set with errors again proving crucial as he handed Djokovic a first set point, as a down the line backhand passing shot landed well wide, and then the set, as a cross court backhand sailed long.
The match lost it's intensity at the beginning of the second set as Federer looked to have little with which to trouble Djokovic and only sporadically came up with the kind of play that has seen him win 12 Grand Slam titles and hold the top spot in the world rankings since February 2004.
The Serb for his part maintained his level and broke in the fourth and sixth games to race out to a 5-1 lead before experiencing a small lapse in concentration when serving for the set and allowing Federer to get one of the breaks back.
There was no such mistake from Djokovic two games later, however, as he took a two sets to love lead, a huge service game ending with an ace.
Despite both players taking turns to hold early break points, the third set went with serve and largely without incident until the 12th game when Djokovic was forced to hold to save the set for a second time.
The Serb, clearly battling with the tension, quickly found himself facing break points. But, as it had done all match, Djokovic's serve came to the rescue and he held to force the tiebreak with an ace and a big first-serve that set up an even bigger forehand winner.
There was little to choose between the two in the early stages of the breaker with Federer coming up with a moment of brilliance followed by two shocking unforced errors in quick succession to leave the scores tied at 3-3 at the change of ends.
The score quickly became 4-4 but two colossal serves later from Djokovic left the Serb holding a first match point.
One was all that was needed though and Federer conceded his Australian Open crown dumping a routine forehand into the net after a lengthy rally.
Novak Djokovic said: "It's very difficult to play against a player who is so dominant on any surface. He has been so successful in the last couple of years in Australia and he had the crowd behind him. I am amazed at the way I coped with the pressure and I played my best tennis."
Roger Federer said: "Of course, I've created a monster, so I know I need to always win every tournament. But semis is still, you know, pretty good."
Eurosport expert Peter Fleming: "There are two areas in that match that really were key. First of all Djokovic serving on big points, he might as well have been Andy Roddick out there. Secondly, in the back-court rallies Federer made far more forehand errors than we've ever seen him do. It just shows that that's his best shot, the one he depends on and it wasn't there for him."
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