Sharapova, who won her first two matches in Melbourne without dropping a game, was irresistible as she crushed the seven-time major winner 6-1, 6-3 in just 79 minutes on Rod Laver Arena.
Sharapova said: "I really wanted this victory. I was 5-1 up (in the second set) and made a couple more errors than I would have liked so I was very pleased to have served it out."
The 25-year-old admitted the match was one she had been eagerly anticipating.
"When we both looked at the draw this was the match-up that we were both looking forward to," said Sharapova.
"I was really excited to play Venus again. She is a great athlete and no matter where she is ranked she's always a very tough player to play."
As Sharapova went marching on, it was the end of the line for Britain's Heather Watson who bowed out to fourth seed Agnieszka Radwanska.
Despite a spirited start, the 20-year-old went down 6-3, 6-1 in 84 minutes on Hisense Arena.
"I thought I had a good start to the match," said Watson. "I had chances early on to break but I wasn't able to convert, and I think after one game that I didn't convert it kind of just slipped away a little bit."
British hopes in the women's singles now rest with Laura Robson who will play Sloane Stephens in the third round.