World No.21 Jarry triumphed 7-6 (7-2) 6-3 in Buenos Aires on Saturday and will face home favourite Facundo Díaz Acosta in the final on Sunday.
Ousted from last month's Australian Open in the quarter-finals by Alexander Zverev, Alcaraz hasn't looked as sharp and aggressive this week as he was a year ago.
The 20-year-old smashed his racket onto the court after his defeat, a rare feature for the Spaniard.
Carlos Alcaraz reacts during his straight-sets loss to Nicolas Jarry. (AP PHOTO)
While he hasn't played in a final since August nor won a title since Wimbledon, this was only Alcaraz's fourth loss on clay in 31 matches since the start of 2023.
It was also only his third loss in 49 matches in the same period against players ranked outside the top 20. Jarry had lost both previous matchups with Alcaraz.
Jarry will play for his fourth ATP singles title, all on clay. He lifted his previous trophies in Bastad 2019, Genoa 2023 and Santiago 2023.
The Chilean was also competitive against Alcaraz last year at the Rio Open tournament, but left the court in tears after a defeat in three sets.
"Carlos is one of the best, this means a lot to me," Jarry said after the match. "After the battle I had a couple of days ago (against Stan Wawrinka), a tough one physically, I am extremelly happy I managed to compete again."
Díaz Acosta, entered as a wild card at a career-high ranking of 87, defeated Argentine compatriot Federico Coria 6-2 6-3 in his first tour semi-final.