McDonald scored the winning penalty for Celtic at Hampden Park
Celtic defeated Dundee United on penalty kicks to set up a Co-operative Insurance Cup meeting with Rangers after an incredible semi-final.
Artur Boruc denied United midfielder Willo Flood, while Lukasz Zaluska saved from Scott Brown in an even first half.
United dominated after the break, but Celtic's Marc Crosas and Georgios Samaras struck the bar in extra time.
Both sides scored 10 of their first 11 penalties, Willo Flood skied his second attempt and Scott McDonald fired home.
It was a nightmare end for Flood, tipped to join Celtic during the January transfer window, as United lost their second penalty shoot-out in 11 months after being pipped by Rangers in last season's finale.
And the dramatic conclusion to a war of attrition on the paddy field that is Hampden set up the first Old Firm final since 2003 on 15 March.
United manager Craig Levein had shuffled his pack to create a five-man midfield designed to prevent Celtic charging into the kind of 2-0 lead established in the recent league draw between the sides.
Interview: Celtic striker Scott McDonald
But there were some nervous moments early on in the United defence as both sides came to terms with a treacherous playing surface that limited them to a series of half-chances during the first half.
Flood belied suggestions that he might be unsettled by Celtic's admission that they are considering a bid for the midfielder by weaving into the area and forcing goalkeeper Boruc to tip a low shot past his near post.
Shunsuke Nakamura threatened a couple of times for Celtic, Francisco Sandaza squandered a chance for United and headed just wide, while Jan Vennegoor of Hesselink sliced wildly past after some clever play at the other end.
Flood's miss handed Celtic the upper hand in a dramatic climax
Lukasz Zaluska, who has signed a pre-contract deal with Celtic, foiled his future employers by pushing away Scott Brown's 20-yard drive.
The United goalkeeper was forced into a fine tip over the crossbar early in the second half after Nakamura whipped in a wicked free-kick that was heading for the far corner of the net.
Glenn Loovens, who had started in place of injured Celtic captain Stephen McManus, was given only a yellow card when he halted Warren Feeney, referee Calum Murray deciding that the defender had not been the last man.
United were starting to dominate possession and Prince Buaben fired a low drive just wide from the edge of the box.
But Celtic had claims for a penalty waved away when substitute Barry Robson went down under pressure from Morgaro Gomis.
Quality of penalties was phenomenal - Strachan
And the Glasgow side began to take control before the tie moved into extra time, with both Samaras and Nakamura firing efforts into the side netting once play had restarted.
Flood almost broke the deadlock when he sped through the Celtic defence and his shot fell the wrong side of the far post from an acute angle, while the unmarked Feeney just failed to connect from six yards out.
Desperate defending denied Celtic in the closing moments, Mihael Kovacevic blocking a McDonald header, a Crosas chip and a Samaras header struck the underside of the crossbar and Garry Kenneth stopped a goal-bound effort from Barry Robson.
The scene was set for an enthralling shoot-out in which both sides converted their first eight penalties.
Lee Wilkie and Glenn Loovens had their efforts saved by goalkeepers who then scored against each other before Flood struck the crossbar to allow McDonald the chance to end a Hampden Park thriller.
Celtic manager Gordon Strachan: "I really thought we were terrific and I think the games should have been finished before the shoot-out.
"You've got to give credit to Dundee United for standing up and being counted.
"I thought the best player on the pitch was Marc Crosas - for being out for so long - was terrific, but neither side had too many weaknesses.
"I do believe, since I came back here for football, Lee Wilkie's comeback from injury has been one of the outstanding things I've seen.
"Like most people, I thought he was dead and buried for being out for three years and I think he's every right to be involved in player of the year."
Dundee United manager Craig Levein:
Interview: Dundee United manager Craig Levein
"There's only three things that can happen in a football match, you can win, lose or draw - we lost.
"But there's a way to lose and I said that last season after the final and I thought we were even better tonight.
"We'll learn from this again and be back here again as quickly as we can.
"We only scored three penalties in the final last season, but we got 10 this time, so maybe we need to score 16 or 17 to win.
"I can't fault the players. What can I say? It becomes a lottery, but how many times do you see a team lose a shoot out yet score 10?"
Celtic: Boruc, Hinkel, Caldwell, Loovens, Naylor, Nakamura, Scott Brown, Crosas, McGeady (Robson 75), McDonald, Vennegoor of Hesselink (Samaras 73).
Subs Not Used: Mark Brown, Hartley, O'Dea.
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