The 29-year-old Khachanov, a seven-time winner on the ATP Tour, is playing his first tournament since falling to Taylor Fritz in the Wimbledon quarter-finals.
He will now meet fourth-seed Ben Shelton, who won the all-American second semi-final battle against second-seeded Fritz, in straight sets - 6-4 6-3.
Russian Khachanov staved off two match points in the third-set tiebreaker to triumph in two hours 53 minutes and book his spot in a first Masters 1000 final since 2018, when he lost to Novak Djokovic in Paris.
"I had to dig deep and lift my level. It was a very demanding, very mental, very physical match. So I'm very happy to get the win after losing some easy ones to him in recent years," said Khachanov, referring to three consecutive losses to Zverev in which he won a total of 14 games.
"Today was a real close one. I was match point down, if the ball touches the net and drops over we wouldn't be talking now."
Zverev, the 2017 champion with 24 tour titles, is ranked third in the world. The German ended up the top seed with top-ranked Jannik Sinner - the 2023 winner - and No.2 Carlos Alcaraz skipping the hard-court tournament.
Shelton was most pleased with his game.
"I've seen so many big improvements in my game this week, that's what I'm most happy about, how I'm executing, how little I'm hesitating, how I'm returning," he said.
"There are a lot of things to be proud about and beating two top-10 guys back-to-back is huge for me."
The 22-year-old Shelton, who eliminated Australia's No.9 seed Alex de Minaur in the round earlier, is seeking his third career ATP Tour title. He won in Tokyo on hard courts in 2023 and Houston last year on clay.
"I'm just really excited to see myself executing like this, not wondering if the shot is going to go in or out, but expecting it to go in."
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