Nadal, a 14-times grand slam champion, has endured an indifferent season winning just two titles in Stuttgart and Buenos Aires prior to Sunday and dropped to number 10 in the world rankings.
World number 32 Fognini, who won the Hamburg title in 2013, was aiming for an almost unthinkable third claycourt victory against Nadal this season following successes in Rio de Janeiro and Barcelona.
Nadal, whose previous air of invincibility on clay has begun to evaporate, hit just six winners and 15 unforced errors in an evenly contested opening set.
He was, however, aided by Fognini who was broken three times in the set and blundered 34 of his own unforced errors following a series of brutal baseline rallies.
Nadal appeared to have gained the upper hand early in the second set and broke en route to a 3-1 lead but Fognini roared back with successive breaks to take a 4-3 lead.
In a topsy-turvy set Nadal and Fognini were unable to gain the ascendancy and traded breaks as parity was restored at 5-5 before the Spaniard took a 6-5 lead to leave his opponent to serve it into a tiebreak.
Fognini was unable to do so and succumbed to defeat when he blazed a forehand long before a clearly emotional Nadal fell to his knees and saluted the crowd after the final point.
The Italian eighth seed played his part in an entertaining final crushing 39 winners to Nadal's 19.
Image: Rafa Nadal
Photograph: Clive Brunskill/Getty Images