The Swiss will play Nadal's countryman David Ferrer in Sunday's final at the showcase eight-man event in Shanghai following his 6-1, 6-3 thrashing of American Andy Roddick in the first semi-final.
Federer, chasing a fourth Masters Cup title in five years, took just 59 minutes to see off Nadal in his most emphatic win over the world number two to date.
The 12-times grand slam champion, who also beat Nadal in last year's Masters Cup semi-finals, broke through at 5-4 in the first set, smashing a forehand down the line to seize the initiative.
The Swiss won 20 of 21 points from 4-4 in the opening set. He turned the screw in the second, breaking for 2-0 by forcing Nadal into a forehand error.
Worse followed for Nadal, a double-fault gifting Federer a 4-0 lead and the defending champion delivered the coup de grace with a thumping crosscourt forehand.
Nadal had boasted an 8-5 head-to-head record against Federer, although they had split their four matches this year.
RODDICK INJURED
Ferrer, meanwhile, has been a revelation in his Masters Cup debut. The only player undefeated in the tournament, he, swept to a 3-0 round-robin record to finish top of the Gold Group.
Cheered on by a raucous section of trumpet-blowing fans draped in Spanish flags, he was already leading 3-1 when Roddick appeared to jar his back stretching for a high volley.
The American, not helped by a quick turnaround following his 6-4, 6-2 thrashing by Federer the previous evening, called for the trainer at the change of ends for a rubdown.
It made little difference as Ferrer continued to pile on the agony, picking Roddick off from the baseline and making him chase drop shots, putting more strain on his sore back.
The Spaniard broke for 4-2 in the second with an incredible backhand pass that whistled past a dazed Roddick, who blew three break points in the next game in his final throw of the dice.
(Editing by Pritha Sarkar)
