Having dug in early on to stay with Federer, Nishikori ended up running away with the match to inflict a first straight sets defeat in the ATP Finals round-robin stages on the 20-time Grand Slam champion.
Roger Federer was handed the Sunday night prime time slot for the opening match of his 16th ATP Finals but fluffed his lines in an error-strewn 7-6 (4), 6-3 defeat by Kei Nishikori.
The opening loss means Federer is now in danger of failing to qualify for the semi-finals for just the second time in 16 appearances at the event
After Kevin Anderson had beaten Dominic Thiem in the day's supporting act, the crowds packed into the O2 Arena and settled in for another Federer masterclass.
What they got instead were 34 unforced errors flying off the Swiss great's frame as his timing fell apart, and the sight of a tetchy Federer falling out with the umpire.
Having dug in early on to stay with Federer, Nishikori ended up running away with the match to inflict a first straight sets defeat in the ATP Finals round-robin stages on the 20-time Grand Slam champion.
To sum up Federer's night, he received a warning from umpire Damian Steiner in the 12th game of the opening set when he bashed a ball into the crowd.
"He thought I was angry. I wasn't. Now I'm angry because I lost," Federer, who will face Thiem on Tuesday in a match he will need to win to revive his hopes of reaching the semi-finals of the event for a 15th time.
Federer was far from his best but still looked to have Nishikori where he wanted him during the early exchanges in a match dubbed the "Uniqlo derby" after his recent switch to the same Japanese clothing supplier as his opponent.
It looked bleak for Nishikori when he served at 5-6 and fell behind 0-30 with a woeful volley but he wriggled out of trouble with the aid of one improvised backhand bunt that caught Federer on his heels and resulted in the Swiss hitting the ball high into the stands more in frustration than anger.
While he played down the subsequent warning afterwards, Federer was not himself in the tiebreak, going down 6-1 with a flurry of errors before clawing back to 6-4.
A netted forehand offered Nishikori the opener though.
Nishikori double-faulted to hand Federer the first break of the match at the start of the second set but Federer gifted back the advantage in the next game when he again had words with the chair umpire after taking too long to challenge a call.
Federer lacked his usual panache and dropped serve again to trail 4-2 and Nishikori calmly held at 5-3 for victory -- his first over Federer since 2014.
"I'm glad to win, it is never easy to play with my idol, it is always a big challenge against him, so it was great to win today," world number nine Nishikori, who will face Anderson next, said on court.
"I had to change something against him, I lost twice against him in two months. I played good tennis, using the forehand more and more aggressive and it came together in the second set."
Wimbledon runner-up Anderson was arguably the day's most impressive performer as he became the first South African since Wayne Ferreira in 1995 to qualify for the ATP Finals.
Thiem was outplayed by South African debutant Anderson in the first set of the opening match in Lleyton Hewitt group.
The Austrian made a match of it in the second set and was involved in a gripping tiebreak but went down 6-3, 7-6(10).
Anderson repelled a fierce Thiem fight back, saving a couple of set points in the second set tiebreak before clinching a debut win with his 13th ace -- celebrating by inviting the crowd to join in a verse of "happy birthday" to his watching wife Kelsey.
The Gustavo Kuerten Group, featuring world number one and tournament favourite Novak Djokovic, Marin Cilic, Alexander Zverev and American debutant John Isner, begins on Monday.
