In what will perhaps be a career-defining win, Stephens advanced to the last four and a clash with reigning champion Victoria Azarenka, with a 3-6 7-5 6-4 victory.
An overwhelmed Stephens, who is just 19, thrilled the crowd and was speechless in the post-match interview, as a stunned Williams left the court.
"This is so crazy, oh my gosh," the 29th seed said, through tears, to a rapt crowd at Rod Laver Arena.
"I'm sure my grandparents are going to be freaking out because they'll be watching it on the computer."
Stephens said she planned to enjoy her showdown with Azarenka for a place in the Open final.
"You've just got to go out and do your thing again," she said.
Williams was shaky through the second and deciding third set, when countrywoman Stephens seriously challenged the queen of the court and threatened an upset.
Williams, though, seemed troubled with some back soreness and was not as slick around the court as the five-times Australian Open winner was in her commanding first-set win.
And Stephens, facing her idol, confidently and skilfully pushed the struggling Williams for every point.
Williams left the court during the second set for treatment after appearing to pull a muscle in her back while lunging for the ball.