Federer had lost nine of their last 11 meetings but subjected the Spaniard to an indoor masterclass in front of a spellbound full house at London's O2 Arena.
The Swiss legend reeled off one incredible forehand winner after another in the first set before somehow lifting his game several levels in the second, and Nadal simply had no answer.Continue reading the main story
It's a surprising result. I wish Rafa all the best for the rest of the group. I'm excited about the way I played. It's a weight off my shoulders to play the last match without such pressureRoger Federer
Federer cantered to a breathtaking victory, winning 6-3 6-0 in exactly an hour to book his place in the semi-finals with a match to spare.
The 30-year-old said the victory would rank as one of his all-time favourites.
"It's definitely one of the nice ones, that's clear. I had some good ones in my lifetime but this one ranks high because it's against my biggest rival.
"To come through so convincingly is great for me because we know Rafa has a certain standard which he does not go below."
Federer can enjoy Thursday's meeting with the now eliminated Mardy Fish while Nadal battles it out with Jo-Wilfried Tsonga for the right to progress from Group B.
This was the match that brought the 2011 season-ending championship to life, especially after Tuesday's news that Andy Murray was pulling out of the event through injury.Continue reading the main story
Federer and Nadal were meeting for the 26th time and while Nadal still leads the head-to-head 17-9, the scars of such a brutal defeat could stay with him for some time yet.
After the match Nadal vowed to bounce back and qualify for the semi-finals.
"It's not the moment to say goodbye," he said. "It's the moment to keep fighting. I'm still in the tournament.
"Today he played too good for me, just accept that."
Aside from a double-fault on the very first point, it is difficult to remember Federer making a genuine unforced error all night.
Three magnificent inside-out forehand winners in as many games set the tone, and he broke Nadal's resistance to lead 4-2 after the Spaniard went wide at the end of a scintillating rally.
The spectators had arrived expecting something special but this was something else. On numerous occasions, many of them were out of their seats celebrating with wild abandon.
Federer secured the 32-minute first set with a sweeping forehand put-away - finishing with 12 winners to Nadal's one - but the best was still to come.
A beautiful forehand down the line enabled Federer to grab the second-set momentum, and Nadal looked shellshocked as the 16-time Grand Slam champion repeated the trick to move 3-0 in front.
Nadal suffered from stomach problem during Sunday's win against Mardy Fish, but he did not play badly against Federer - it just seemed impossible to knock the world number four out of his stride.
Federer, who will rise above third-ranked Murray if he reaches the final, varied it up by throwing in an unstoppable backhand to get the triple-break.
And a memorable triumph - featuring 28 winners to four - was sealed when a helpless Nadal went wide with a defensive backhand.
Meanwhile, Max Mirnyi and Daniel Nestor qualified for the semi-finals of the doubles after their 6-4 6-3 victory against Mariusz Fyrstenberg and Marcin Matkowski.