A fourth-seeded Federer (2-0) put on a clinic in drilling his fellow former world No. 1 Nadal (1-1) in convincing 6-3, 6-0 fashion in Group B round-robin action on the indoor hardcourt at The O2 Arena. With the big victory, Federer booked a spot in Saturday's semifinals here.
Nadal can still reach the semis by beating Jo-Wilfried Tsonga on Thursday.
Also in London on Tuesday, a sixth-seeded Tsonga straight-setted eighth-seeded Mardy Fish in Group B, while injured world No. 3 Andy Murray pulled out of the exclusive field at this season-ending extravaganza.
In a rematch of last year's World Tour finals title match, the 30-year-old Federer improved to 9-17 lifetime against the 25-year-old Nadal by dispatching the Spaniard in 61 minutes. The match was tied at 2-2 in the first set before the Swiss great rattled off wins in 10 of the next 11 games.
Federer also beat Nadal in last year's finale here in London.
An in-form Federer struck 12 winners to only one for Nadal in the first set on Day 3. And in the second set, the iconic Federer broke Nadal three times for a 5-0 lead and promptly served out the match with his typical Swiss precision, converting on his first match point of the night. Federer recorded his third career bagel set against Nadal in the process on Tuesday.
Federer cracked six aces and did not face a break point in the unexpected rout.
Nadal had been a perfect 3-0 against Federer this year, including a victory in the French Open finale.
Federer is now a perfect 4-0 lifetime against Nadal on indoor surfaces.
Tuesday marked the first time that Nadal and Federer met when neither of them held the No. 1 ranking.
The five-time World Tour Finals champ Federer is currently riding a 13-match overall winning streak, including back-to-back titles in his native Basel and at the Paris Masters. The 16-time Grand Slam champ is tied with Pete Sampras and Ivan Lendl for the most titles at this prestigious event. The Swiss superstar was also a finalist at this season-ending tournament back in 2005.
Federer will meet Fish here on Thursday.
Meanwhile, the French Tsonga (1-1) doused the American Fish 7-6 (7-4), 6-1 on Tuesday. Tsonga improved to 2-0 lifetime against Fish by breaking the American's quality serve five times and popping seven aces among his 33 winners in their hour-and-a-half affair.
Fish (0-2), slowed by a left hamstring injury, has been eliminated from semifinal contention this week.
"You're going to have to pry me off the court to not be able to compete in an event like this," Fish said. "I worked very hard this past year, these past two years, made a lot of sacrifices. These are the rewards, playing in an event like this."
"That's why I say, it's very disappointing to not be able to play at the level that I would like to play at," Fish added.
The Scottish Murray (0-1), meanwhile, lost to David Ferrer (1-0) in straight sets here on Monday in a match where he was slowed by a groin injury and then pulled out of the tournament on Tuesday.
"I was just trying to find reasons why I should try to play," Murray said. "But, you know, there was no real positives coming out and playing because yesterday I was really unhappy on the court. I wasn't enjoying it at all."
"This is one of the best tournaments in the year, one that I think me and all of the players look forward to playing. I couldn't give anywhere near my best."
Murray captured five titles this year and was the runner-up at the Australian Open.
Alternate and world No. 9 Janko Tipsarevic replaced Murray in Group A.
In Group A round-robin play on Wednesday, the current world No. 1 Djokovic (1-0) will meet the seventh-seeded 2007 Tour Finals runner-up Ferrer and fifth-seeded former Wimbledon finalist Tomas Berdych (0-1) will battle Tipsarevic, who will be making his debut at this tournament.
Djokovic was the Tour Finals champion back in 2008 and is the reigning U.S. Open, Wimbledon and Aussie Open titlist. He is an amazing 70-4 this season.
This lucrative event typically features only the top-eight players in the world. Round-robin play will be staged through Friday, while the semifinals will be held on Saturday and the final will be played Sunday. The top-two finishers from each group will compete in the semis.
This week's big winner will earn at least $770,000. An undefeated champion would pocket $1.63 million.