Just five weeks after undergoing knee surgery, seven-time Wimbledon champion Djokovic reached his 10th final at the All England Club with a 6-4, 7-6 (7/2), 6-4 win over the Italian 25th seed.
Alcaraz defeated Daniil Medvedev 6-7 (1/7), 6-3, 6-4, 6-4 to reach a fourth Grand Slam final.
Djokovic, 37, can equal Roger Federer's record of eight Wimbledon titles and become the tournament's oldest champion of the modern era if he avenges last year's final loss to Alcaraz.
"I have said it many times Wimbledon has been a childhood dream for me to play it and to win it," said Djokovic, who left Serbia in his youth to train in Germany after escaping the NATO bombing of Serbia in the 1990s.
"It is worth repeating I was a seven-year-old boy watching the bombs fly over my head and dreaming of being on the most important court in the world which is here in Wimbledon," he said.
The last time Djokovic and Musetti met was at the French Open in June when the Serb claimed victory in a third round tie which ended at 3:07 in the morning.
On Friday, however, Djokovic was untroubled on his way to a 37th Grand Slam final.
He broke for 4-2 lead in the opener and, despite surrendering the advantage and letting two set points slip in the ninth game, he broke again in the 10th to claim the set.
The second seed was playing in his 49th Grand Slam semi-final while the 22-year-old Musetti was in his first.
That experience was key as Djokovic hit back from losing serve in the opening game of the second set to level in the sixth before dominating the tie-break.
A break in the opening game of the third set launched him on his way to victory against a demoralised Musetti, who saved three match points before Djokovic completed his progress to yet another Wimbledon final.
"I feel a little sad but I have to say Novak played an incredible match," said Musetti.
"He showed that he's in great shape, not only in tennis but physically."
He added: "We have played seven times but I have never seen Novak play like this today."
Alcaraz defeated Djokovic in the 2023 Wimbledon final in a five-set thriller.
'Really difficult'
Victory on Sunday would make him only the sixth man to win the French Open and Wimbledon titles back to back.
"Obviously it will be a really difficult match," said Alcaraz.
"But I feel like I am not new anymore. I know how I am going to feel before the final. I have been in this position before."
Alcaraz crunched 55 winners to the 31 from Medvedev in his semi-final.
Medvedev, beaten by the Spaniard at the same stage last year, twice led with breaks in the first set only to be pegged back.
Such was his frustration that he was handed a warning for unsportsmanlike conduct by umpire Eva Asderaki for an apparent foul-mouthed reaction to a ball called for bouncing twice as he was broken in the ninth game.
The tournament referee and supervisor were summoned to Centre Court by Asderaki, but Medvedev shrugged off the incident to sweep through the tie-break and take the opening set.
"I said something in Russian, not unpleasant, but not over the line. So I got a code for it," Medvedev said of his outburst.
It was the third time at this year's Wimbledon that Alcaraz had dropped the first set.
Alcaraz recovered impressively, breaking Medvedev for a 3-1 lead in the second, having come out on top in the previous game on the back of a 27-shot rally.
The 21-year-old then hit 14 winners in the third set, pocketing the only break in the third game.
Medvedev, who had knocked out world number one Jannik Sinner in the quarter-finals, retrieved a break early in the fourth set.
But Alcaraz kept up his assault, edging ahead again for 4-3 on his way to victory.
"Probably in my career he's the toughest opponent I have faced. But I have time to try to do better," said Medvedev after a fifth defeat in seven matches against Alcaraz.
