World number two Djokovic continued his fine start to 2011, the Serb having now racked up 32 consecutive wins and six titles since the turn of the year.
Top-ranked Nadal, whose previous reverse on his favoured surface came to Robin Soderling in the fourth round of the 2009 French Open, was ground down in a ferocious contest lasting two hours and 17 minutes.
The last time the two players met at this event, in the semi-final two years ago, it needed over four hours to separate the pair before Nadal recorded a 6-3 7-6 (7/5) 7-6 (11/9) victory.
And again it was a rollercoaster ride right from the start, with Djokovic having to save two break points in the opening game of the first set.
The Serb managed that, though, and then raced into a 4-0 lead after twice breaking defending champion Nadal and holding his other service game to love.
It was looking worrying for Nadal at that stage but, backed by a partisan crowd at La Caja Magica, he pulled a break back in the fifth game, aided by a Djokovic double fault on the decisive point, and then did the same in the ninth game.
Shift
The momentum looked to have dramatically shifted to Nadal, but Djokovic recovered and forced three sets points on his opponents serve in the next game, the 10th of the set.
Nadal managed to save all of them, but it was to prove only a brief reprieve for the Spaniard as Djokovic won the next eight successive points – including breaking Nadal to love in the 12th game with the help of two fortunate net-cord bounces – to take the first set.
The second set started in similarly remarkable fashion as the first had ended, with Nadal gaining revenge for the previous game by also breaking Djokovic to love – one of the Spaniard’s winners being a brilliant through-the-legs lob shot that sent the Madrid crowd and even Djokovic wild.
Once again, though, Djokovic hit back straight away, breaking Nadal’s serve in the next game to level the scores up at 1-1.
The third game passed with little incident, Djokovic holding to 15, but there was another break point in the fourth, although this time Nadal was able to hold.
There were no more break points until the 10th game of the set, when Djokovic raced into a 15-40 before breaking again to clinch a thrilling victory, his first in 10 attempts on clay against Nadal.
The 23-year-old from Belgrade is fast closing on John McEnroe’s record of 42 wins in a row to start a season, which the American achieved in 1984.
Satisfied
“On clay it is definitely my finest (win),” Djokovic told Sky Sports. “Under the circumstances I played probably the best match of my life on clay against the world number one and the player to beat on this surface.
“The way I played was just fantastic and I’m definitely satisfied with the performance and the overall tournament.”
On his superb start to 2011, he added: “I didn’t expect that. I don’t know what to say other than I’m thinking about winning every match.
“I’m not prioritising any records or how long this run will go, I’m just trying to remain a dedicated professional – and the work is paying off.”
Nadal, who had taken titles in Monte Carlo and Barcelona in the last month, was gracious in defeat.
“He is playing at a great level this year and you just have to accept that,” he said.
“I’ll have to look at what I did wrong and go forward with the right attitude and look for solutions and how to improve.
“Evidently, I wasn’t playing at my best level on clay but I didn’t play such a bad match either. Just that against a very good Djokovic it wasn’t enough today.”
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Novak Djokovic ends Nadal run