Henman won 7-6, 7-5 and will now meet the Slovakian Karol Kucera, who came from behind to beat Michael Tebbutt 4-6, 7-6, 6-0. Henman traded four breaks of serve with the US Open winner from 1-1 in the first set before the set went into a tie-break, which he won 7-5. At the start of the second set, however, Rafter broke Henman's serve and at one stage led 4-2. But the British No 2 broke back to level at 4-4 before squandering his first match point at 4-5.
Henman held on and earned two more match points two games later and although Rafter was able to save the first, on the second he volleyed a return out to give Henman victory.
Henman said afterwards: "I'm very pleased to have beaten Pat Rafter in front of his home fans. With him being US Open champion and No 2 in the world it's a big win for me, and it's a big boost to my confidence going into the Australian Open."
Henman never allowed Rafter to settle into any sort of rhythm and he admitted the quality of his returns won him the match. "I would say perhaps I could have served a little bit more consistently, but at the end of the day I won and that's the most important thing."
Henman is unseeded for the first Grand Slam of the year, but has high hopes of going far in a tournament which he exited at the third-round stage 12 months ago. "I'm pretty happy with the way things are going. I couldn't have any complaints whether I win or lose tomorrow, so it's a good way to come into a Grand Slam," he said.
Henman has been drawn to face a qualifier in the first round of the Australian Open, as is the British No 1, Greg Rusedski, who is seeded five.
Rusedski also won yesterday, beating Austria's Thomas Muster 6-3, 7-6 in the Kooyong Classic. The win was Rusedski's first in three matches at the event, in which he, Pete Sampras and Muster were reduced to the consolation group. Sampras, however, slumped to his second defeat in three days, losing 3-6, 6-3, 6-2, to Andrei Medvedev.
Mark Philippoussis won a three-set battle with Gustavo Kuerten to reach today's final of the tournament, where he will play Andre Agassi.
Venus Williams reached the Sydney International final, beating Japan's Ai Sugiyama 6-1, 7-6, but an all-Williams final was not to be, her sister, Serena, losing 6-2, 6-1 to Arantxa Sanchez Vicario.