The 21-year-old substitute drifted inside from the left and hammered home a fierce strike that Pachuca goalkeeper Oscar Perez could do nothing to stop.
The Porto Alegre side will meet the winners of Wednesday's semi-final clash between holders Real Madrid and Al Jazira of Abu Dhabi in Saturday's showpiece.
"We were nervous at the start and we didn’t need to be," said Gremio coach Renato Portaluppi. "We played football and we started to create more chances in the second half.
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"It’s the end of the year as well, we are tired but we were the better team and now we can concentrate on the final."
Gremio, winners of the Intercontinental Cup - the forerunner to the Club World Cup - in 1983 and runners-up in 1995, will now aim to become the first non-European team to win the title since compatriots Corinthians beat Chelsea in 2012.
Both Latin teams fought out a scrappy 90 minutes in Al Ain that featured 35 fouls and few clear-cut chances.
Gremio were the slightly more positive side, particularly in the second half, with Edilson coming close to scoring with three free kicks and Pachuca keeper Perez doing well do turn a goal-bound shot from Luan round the post after an hour.
At the other end, Gremio defender Bruno Cortez made two excellent blocks in the first half while Pachuca's Victor Guzman scraped the outside of the post with a header after 80 minutes.
The defeat was another letdown for the CONCACAF Champions League winners, who had Victor Guzman sent off for a second yellow card with 10 minutes of extra time remaining.
The Mexican side have now played in five Club World Cup tournaments without reaching the final.
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