The hard-serving Canadian fell 7-6 (2), 7-6 (5) to David Ferrer on Saturday as the Spaniard advanced to his fourth final at the tournament.
"I played a good match and really tried on my opportunities," said Raonic, who lost three times for Ferrer last season. "He was too good when it mattered. That's what makes him a great player who has beaten me every time we've played."
The third-seeded Ferrer will face six-time champion and fellow countryman Rafael Nadal in Sunday's final. Nadal beat 2010 winner Fernando Verdasco 6-0, 6-4 in the other semifinal.
"I'm very happy to make my fourth final," Ferrer said. "I have a special relationship with this tournament. I hope I can fulfil my dream of finally winning here."
The 21-year-old Raonic, ranked 25th in the world, hit 15 aces against Ferrer, displaying the same massive serve that led to his upset of Andy Murray in the quarter-finals.
But Ferrer, sixth in the ATP rankings, worked his Canadian opponent around the clay court with well placed ground strokes and proved the better finisher in the two tiebreakers.
Down 3-1 in the second-set tiebreaker, the sixth-ranked Ferrer fought back and claimed the match in just over two hours with a superb return that clipped the sideline.
"It was very difficult to beat him," said the 30-year-old Ferrer. "We both had our chances. It was a question of winning or losing the key points."
Ferrer, who has won three titles already this season, has lost the three previous finals here to Nadal.
Raonic, who grew up in Thornhill, Ont., was bidding for a breakthrough after a positive week in the city where he trains with Spanish coach Galo Blanco.
"I feel my game is really improving, which I credit to improved mental toughness," Raonic said. "That's responsible for 90 per cent of my success."
A ruthless Nadal dominated from the start against Verdasco, winning 21 of 27 points to steal his opponent's first three service games and set him on his way to his 33rd straight win at the competition.
"Rafa is the best clay-court player ever," said Ferrer. "He has beaten me three times in the finals here. I hope tomorrow is different."
Verdasco, who won here in 2010 when Nadal sat out the tournament he has otherwise dominated since 2005, barely offered resistance as the world's second-ranked player hit winner after winner.
Nadal ran off seven straight points to open the match, breaking Verdasco's first service game with an intimidating smash.
"I began the first set very strong, and getting the first break gave me a lot of confidence," Nadal said. "He also made some errors early on which helped me."
Verdasco dropped his second service game when his volley fell wide, and Nadal kept pressing, not dropping a point in the fourth game to race out to an insurmountable lead as light rain began to fall.
Down a set, Verdasco showed some fight and had a chance to break the favourite early, but Nadal won three straight points with strong serves to hold on.
But Verdasco faltered in the fifth game when after saving three break points he committed a costly double fault to fall behind for good at 3-2.
Nadal improved to 13-0 all time against Verdasco and predicted a close final.
"David is always tough. He is a rival you never want to face," Nadal said. "I wish him the best. Well... not for tomorrow, but for the rest of the season."
Meanwhile in doubles, Toronto's Daniel Nestor and partner Max Mirnyi of Belarus lost in the semifinals to Mariusz Fyrstenberg and Marcin Matkowski 6-3, 0-6, 10-6 of Poland.
Nestor is a four-time doubles champion in Barcelona.
— With files from The Associated Press