The midfielder rose majestically at the far post to power Neymar's corner into an open net after Edinson Cavani's low shot had cancelled out Fred's first-half opener.
It was a bitter pill for La Celeste who thwarted the hosts for long spells and were left to lament Diego Forlan's 13th minute penalty miss.
The result means Brazil will now compete for their third straight Confederations Cup title at the Maracana on Sunday where they will meet either Spain or Italy.
The Samba Boys came into the last-four showdown on the back of a record-breaking 10-match winning run in the tournament and few outside Uruguay were giving Oscar Tabarez's men much hope of securing a first success over their illustrious opponents since 2001.
On the pitch Brazil's pre-match preparations went well, but off it the problems continued as up to 50,000 protestors clashed with police outside the stadium.
Inside the ground the Brazilians had made a habit of fast starts in the group stage but they toiled in the opening exchanges as Uruguay stuck to a rigid, defensive game-plan.
Forlan stepped up but saw his low shot brilliantly pushed past the post by Julio Cesar.
Next, Cristian Rodriguez could have done better when he guided his lobbed header over the bar after Cesar could only punch a clearance to the edge of the box.
Hulk finally went close for Brazil when he exchanged a one-two before firing over, while at the other end Forlan's delightful turn and shot curled inches past the near post upright.
It looked like being a stalemate at the interval until the hosts sprung forward and caught La Celeste napping on 41 minutes.
Neymar broke free on the left of the area to chest a long pass into his own path. The 21-year-old saw his stabbed effort well saved by Fernando Muslera but Fred was on hand to scuff in the rebound and send the crowd into raptures.
Uruguay needed to step up a gear after the interval and they took just three minutes to restore parity.
A mix-up in the Brazilian defence resulted in a series of ricochets before the ball fell to Cavani, who made no mistake with a low shot that fizzed into the far corner.
It seemed like it was going to be another half of frustration for the Samba Boys with a 45-yard free-kick from Hulk the closest they went to a second.
Uruguay continued to grow as the game wore and Thiago Silva came within a few inches of turning a Forlan free-kick into his own net.
Cavani then saw a low 25-yard shot deflect just wide of the near post as the 2011 Copa America winners pressed.
However, a series of substitutions gave Brazil some renewed impetus and they put La Celeste's defence under some late pressure in the final 10 minutes.
It looked like Tabarez's side would make it through to extra-time but with just four minutes left on the clock their resistance cracked, as Paulinho nodded in Neymar's corner to send the whole country into ecstasy.
MAN OF THE MATCH
Paulinho (Brazil) - In a game where the attacking players struggled to shine, Paulinho played a vital role in the heart of the Brazil midfield and eventually popped up with the crucial winning goal.
BRAZIL: Cesar 7, Alves 6, Marcelo 7, Thiago Silva 5, Luiz 5, Luiz Gustavo 5, Oscar 5, Paulinho 7, Neymar 6, Fred 6, Hulk 5. Subs: Bernard 5, Hernanes 5, Dante 4.
URUGUAY: Muslera 6, Lugano 7, Godin 7, Rodriguez 6, M Pereira 6, Arevalo 6, Gonzalez 6, Caceres 6, Forlan 6, Cavani 6, Suarez 5. Subs: Gargano 5.