The top-ranked Spaniard also claimed his first win over Federer on an indoor hard court.
Nadal, who extended his winning record over Federer to 22-10, has now beaten the Swiss player on every surface. Federer had won their four previous matches at the ATP Finals, dropping only one set.
"The most important thing for me is (that indoor) is the toughest surface for me to play," Nadal said. "The most difficult for me was to be able to win four matches against top eight players. It's a very good way to finish the year."
Nadal, who is bidding to win the elite event for the first time, played down the importance of his victory over his greatest rival. In London, he won his three round robin matches to progress to the last four and will face either Novak Djokovic or Swiss debutant Stanislas Wawrinka in Monday's final.
"It is probably one of my best seasons," said Nadal, who reclaimed the No. 1 spot this year after coming back from a knee injury in February. "The most satisfying thing is always (to win) the tournament more than the personal victories. So for me it is more important to be in the final in the last tournament of the year than to have the chance to win against Roger."
Since he returned from his seven-month injury layoff, Nadal has produced one of the most impressive comebacks in tennis history sport. He has won 75 matches —losing only 6 —to win 10 titles including Roland Garros, the U.S. Open and five Masters 1000 events.
Federer's season was very different. Hampered by a back injury, he won only one title in 2013 and was hoping to secure a big trophy before the year-end break.
He played aggressively early on but faded after losing the first set, making too many mistakes to threaten the Spaniard.
"In the beginning, his serve worked very well," Nadal said. "My feeling is that in the first set, he played very well. He was closer than me to have the break. So in my opinion until 4-all, he was playing better than me."
Nadal and Federer treated the O2 Arena fans to some superb exchanges early on, reminiscent of the classic matches that have punctuated their nine-year rivalry. But Nadal was much sharper on the important points, converting all four break points he earned, while Federer sometimes looked like a shadow of his old self, hitting 32 unforced errors and some poor volleys.
"I struggled to stay consistent enough throughout the match, and that's why he deserved to win" Federer said. "This game is a game of making or missing your opportunities. Today was a little bit more of that, again."
The 32-year-old Federer, who beat Juan Martin del Potro on Saturday to qualify for the semis while Nadal had a rest day, also looked tired towards the end.
Federer missed an early chance when he failed to convert three break points in the sixth game before Nadal took advantage of his first opportunity to break for 5-4 with a superb forehand winner.
Federer sent the crowd in rapturous cheers as he broke back immediately after winning a long rally with a forehand down the line and Nadal missed a forehand.
But Federer failed to build on the momentum, dropping his serve in the very next game before going on to concede the set. He then struggled with his rhythm and was broken twice in the second set, with Nadal sealing victory when Federer sent a volley long.