A packed O2 Arena brimmed with excitement as arguably the best two players of all time took to the court for their 26th clash in a repeat of last year's final.
Federer had won only seven of their previous meetings but he was simply on another level last night as he wrapped up victory in 61 minutes, winning 10 of the last 11 games.
The Swiss said: “I'm very happy, it's a very surprising result.
“Sometimes you don't live up to your expectations. I've definitely seen Rafa play better but I've definitely played worse.”
Their considerable history certainly weighs heavier on Federer's shoulders, which made the fact they were meeting in a round-robin clash for the first time all the more intriguing.
The feeling was the cushion that provided would allow the 16-time grand slam champion to play more freely, and, with Federer having won all their previous three matches indoors, he was the clear favourite.
It did not look that way at the start when Federer began with a double-fault but he crunched a forehand winner on the next point to get on the board, and in a quite breathtaking sixth game he broke through.
A forehand creamed down the line gave him 0-30, and the Swiss star's aggressive approach then earned him three break points when Nadal offered up an easy smash.
The clinching point summed up what makes the pair so special, the momentum swinging this way and that in a pulsating rally before Nadal (pictured) drove a backhand just wide.
The crowd, who were split fairly evenly, roared their appreciation, and the Swiss flags were waving again shortly afterwards when another Federer forehand winner gave him the first set.
It had been a similar story in the first set of last year's final before Federer's level dipped and Nadal fought back to level.
The Spaniard's confidence is not nearly as high as it was 12 months ago, though, and he was struggling to get sufficient depth on the ball to stem the Federer tide.
And he was made to pay again in the opening game of the second set as the world number four drilled another sublime forehand winner down the line to secure a second break of serve.
Nadal had been troubled by a stomach upset in his three-set win over American Mardy Fish on Sunday, but last night it was Federer's brilliance that was making the French Open champion sick.
He simply could not cope with the speed of the 30-year-old's game and Federer made it four games in a row with another break.
The staple of Nadal's success against his great rival has been his ability to pin Federer on his backhand but the Spaniard's forehand does not have the same bite and kick on indoor courts and his shots were being easily swatted away.
Nadal was battling simply to get on the board in the second set but he could not manage it and Federer wrapped up his first love set against the Spaniard for four and a half years.
The result means Nadal must beat Jo-Wilfried Tsonga in his final Group B match on Thursday to reach the last four.
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