The 22-year-old fought back from 5-2 down in the first set to win 7-6 (7-0) 6-2, converting her fifth match point in a tense final game.
She will face American eighth seed Alison Riske on Friday.
"It was very tough at the end, she really stepped up her game," said Watson, from Guernsey.
"I didn't change and kept doing the same things, but with great players like her you can't expect them to give it to you."
Watson reeled off nine out of 10 games to take control against ninth seed Vinci, and held her nerve after the Italian showed signs of recovering from 5-0 down in the second set.
Watson became the first British woman since 1988 to win a WTA title at the Japan Open two years ago.
Asked if she now saw Hobart as a real opportunity to win her second title, she added: "Definitely, but I'm just thinking about my next match."
The Australian Open gets under way on Monday, and Watson will learn her first-round opponent when the draw takes place at 23:30 GMT on Thursday.
She will be the only British woman in the singles main draw after defeats for Naomi Broady and Johanna Konta in qualifying on Thursday.
Andy Murray will be joined by compatriot James Ward in the men's draw, with the Londoner having qualified directly for a Grand Slam for the first time.
Ward, 27, continued his preparations at the Kooyong Classic exhibition event in Melbourne, where he beat American John Isner 3-6 7-6 (12-10) 6-2.
British number one Heather Watson reached the third WTA semi-final of her career with victory over Roberta Vinci at the Hobart International.