A three-time major champion and five-time runner-up at Melbourne Park, Murray could not overcome Zverev's relentless serve-and-volley approach on Rod Laver Arena and while he broke five times, he dropped serve on eight occasions, as he failed to progress beyond the fourth round of the Australian Open for the first time since 2009.
The shock result leaves the men's draw wide open after defending champion Novak Djokovic was earlier eliminated in the second round.
Federer, who had won the Australian Open four times, takes on fellow Swiss and world No. 4 Wawrinka tomorrow in what promises to be an enthralling semi-final showdown.
"For sure now I'm more confident with myself", he said. I've come back from them.
Murray, who has lost five finals in Melbourne, was the favourite to finally break through after the stunning exit of six-time victor Djokovic.
The Federer show Roger Federer was just one step away from his first Grand Slam final in 18 months on Tuesday after he demolished giant-killer Mischa Zverev to set up an Australian Open semi-final with Wawrinka. The fourth-seeded Wawrinka cruised to a 7-6 (2), 6-4, 6-3 victory over 12th-seeded Jo-Wilfried Tsonga of France. The 30-year-old Spaniard has 14 - but none since the 2014 French Open.
In the intervening years, the 29-year-old had endured a fractured wrist, fractured ribs, a herniated disc and a period where he freely admits he did not focus as much on his game as he should have. "I know what I have to do if I want to win". "I don't know. I mean, every year you come is a different chance".
Zverev, a former junior rival of Murray's, stretched to a series of elastic volleys to halt the nonplussed Scot, coming to the net 118 times. Both legends need to win two games each to set up their first Grand Slam match since the 2014 Australian Open semi-final which the Spaniard won 7-6, 6-3, 6-3. The seven-time Grand Slam victor defeated Anastasia Pavlyuchenkova 6-4, 7-6 in just under two hours.
If she comes out on top, either American Coco Vandeweghe or French Open champion Garbine Muguruza will be waiting in the last four. "That's what you tell yourself and you hope it pays off", he added.
After knocking out Jurgen Melzer, Noah Rubin and Tomas Berdych in the opening rounds, Federer aimed to book his place in Tuesday's quarter-finals when coming up against Japanese global Kei Nishikori on Sunday. Zverev pressured Murray and rushed up to the net for quick return. It was fair to say she was happy - but she is far from done.
"It was definitely the best match of my life, not only because it was a best-of-five set match, it was at a slam", Zverev said.
In the opening two sets Murray had 13 break points on his serve, while having 12 on the Zverev "leftie" serve.
Murray was agitated right from the start, hitting into the net early on and screaming loudly as glanced at his players' box. Kato/Hozumi won 6-3, 2-6, 6-2 against Mirza and Strycova.