Azarenka had to fight back from losing the first set, but with Li in the wars injuring her ankle and taking a nasty fall early in the third set, the Belarusian took advantage to prevail 4-6, 6-4, 6-3.
The victory also ensures that the 23-year-old from Belarus maintains her world No. 1 ranking, if she lost the final she would have surrendered it to Serena Williams. It is also her second Grand Slam title after she triumphed at last year's Australian Open beating Maria Sharapova in the final 6-3, 6-0.
For all of Li's fighting qualities, talent and experience, the 30-year-old still now just has one Grand Slam title to her credit that she won in 2011 at Roland Garros.
Along the way she has made the final of the 2011 Australian Open and the semi finals of the 2010 Australian, but aside from that never advanced beyond a quarter-final in a major.
Li had a host set points when she led 5-4 with Azarenka serving in the first set, and eventually prevailed when the Belarusian double-faulted to allow her to take the opening set 6-4 in 45 minutes.
Azarenka wasn’t deterred, though, and broke Li in the first game of the second set and then broke again to race to a 3-0 lead, but the Chinese star broke back once before rolling her ankle.
She suffered the injury at 30-30 in the fifth game of the set and after an almost eight-minute delay, she had the ankle taped and returned to serve and won the next two points.
Azarenka still led 3-2 but Li quickly won the first three points of the next game to lead it 0-40, but the world No. 1 fought back to then win five straight points herself to steady and lead 4-2 in the second set.
Azarenka, however, couldn’t keep Li down and the sixth-seed fought through to hold her serve and then break the defending champion's to tie things up at 4-4. It was the Belarusian who had the last laugh of the second set, though, winning the last two games to win it 6-4.
The world No. 1 immediately broke Li's serve again to start the third set, but the twists of the final continued when the Chinese star broke back and then held her serve to lead 2-1.
Play was then delayed for 10 minutes due to Melbourne's Australia Day fireworks and soon after Li was in the wars again after she fell heavily on the court and suffered a possible concussion when she banged her head.
She was able to resume and hold serve, but it was Azarenka who had worked her way on top and mentally was much more sound than she was in the semi-final as she cruised through the third set to claim it 6-3.
Azarenka might not have been the most popular Australian Open winner, but she was a deserved one for her performance in the last two sets.
In some ways, she allowed Li to beat herself with the Chinese star forced to go for her shots more due to her sore ankle and head, and she ended up hitting 57 unforced errors and Azarenka took full advantage.
Azarenka was understandably emotional to come away with Melbourne with her second Grand Slam title.
"It has been a really long two weeks for me and there are so many things that I would love to say," Azarenka said.
"I want to thank my team for being there for me. You guys are amazing. I will always keep very special memories of this court and it will be in my heart forever now."
Li vowed to be back again in 2014 to try to win her first Australian Opens after now having lost two finals.
"Congratulations to Victoria for having fantastic results here for the last two years," Li said.
"I really enjoy to play here and of course I have to thank my team. Two weeks ago I had to say I hate my team, but they push me a lot. I know I'm not young, but I am very looking forward to coming back here next year."