The 28-year-old left-hander, playing in Pakistan's last preliminary match of the tournament, surpassed the previous record of 189 established by Viv Richards of the West Indies against England in 1984.
Saeed was in such devastating form that he hit India's leg spinner, Anil Kumble, for 26 runs in one over that included three successive sixes and one four.
Rameez Raja, the Pakistan captain, decided to bat first after winning the toss and the wicket offered no assistance to India's bowlers.
Saeed batted for 206 minutes, most part of it with acute cramps which forced him to use Shahid Afridi as his runner just after he had completed his half century.
Saeed struck 22 fours and five sixes in reaching 194. His wicket finally fell as he appeared to be heading toward a double century. A mistimed pull off Sachin Tendulkar was caught at fine leg by Saurav Ganguly. A partisan Indian crowd of 50,000 gave him a standing ovation.
He shared three good partnerships, 89 runs for the second wicket with Rameez (22), 126 for the third wicket with Ijaz Ahmed (39) and 84 runs for the fourth wicket with Inzamam-ul-Haq (39 not out).
The winner of India-Pakistan match will play against the world champions, Sri Lanka, in the best-of-three final. The four-nation tournament has been organised by India as part of 50th anniversary of its independence. New Zealand lost to Sri Lanka in the first semi-final which was played on Tuesday.
Viv Richard's previous best innings of 189, at Old Trafford in 1984, came off 170 balls, with 24 fours and five sixes, one of which was hit out of the ground.
TOP 10 INNINGS
IN ONE-DAY INTERNATIONALS
194 Saeed Anwar
Pakistan v India, Madras 1997
189* I V A Richards
West Indies v England, Old Trafford 1984
188* G Kirsten
S Africa v UAE, Rawalpindi 1995-6
175* Kapil Dev
India v Zimbabwe, Tunbridge Wells 1983
171* G M Turner
New Zealand v East Africa, Edgbaston 1975
169* D J Callaghan
S Africa v NZ, Verwoerdburg 1994-5
169 B C Lara
West Indies v Sri Lanka, Sharjah 1995-6
167* R A Smith
England v Australia, Edgbaston 1993
161 A C Hudson
S Africa v Netherlands, Rawalpindi 1995-6
158 D I Gower
England v New Zealand, Brisbane 1982-3.
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