The 22nd meeting between the pair brought an eighth success for Federer, who came flying out of the traps at London's O2 Arena and then recovered from some sloppy moments in the second set to race through the decider and triumph 6-3 3-6 6-1.
The title, his first since the tournament moved to London after previous victories in Houston and Shanghai, made Federer the joint holder of yet another record as he drew level with Ivan Lendl and Pete Sampras.
The Swiss star will also head home more than £1million richer after going through the week undefeated, while 1,500 ranking points are a start in his bid to wrest back the number one spot from Nadal, who won three successive grand slams in 2010 but just failed to pick up the one major title still to elude him.
Federer said: "It's fantastic. I'm really thrilled the way I played all week.
To win a fifth time is obviously amazing, for the third time in a different place.
"I'm just really happy the way I was able to finish the season in style, playing some of my best tennis, really saving the best for last.
"Obviously beating Rafa in the final makes it extra special because of the year he had."
Meetings between the two best players of this, or arguably any, era used to be 10 a penny, but today was only their fourth match since the classic Wimbledon final of 2008.
It was even more important then for Federer to come out on top after being well and truly usurped by his great rival as world number one.
Federer seemed to have all the advantages, with the match played on a surface that suits his attacking style and only 24 hours after Nadal's epic semi-final victory over Andy Murray.
The Spaniard's physical qualities are legendary but it quickly became clear he had not recovered fully as he watched Federer winners fly past him.
The 29-year-old had registered 10 winners before Nadal had even managed one, and that finally translated into a meaningful lead in the eighth game when he nonchalantly whipped a backhand winner cross-court to move 5-3 in front.
Four points later Federer had the first set in his pocket, and there seemed to be little way back for Nadal.
But Federer often has little lapses these days, and so it proved in the fourth game of the second set as he drilled a forehand wide to hand Nadal a break.
Nadal played the rest of the set intelligently, conserving energy where he could, and levelled the match with just over an hour played.
Nadal seemed to up his intensity at the start of the decider but there was no doubt how badly Federer wanted the victory and, when he piled on the pressure again, Nadal had no answer.
The second seed played a terrific point to break for a 3-1 lead and from there it was straightforward for Federer as he reeled off five games in a row to clinch victory.
Nadal refused to acknowledge the part his physical condition played in the defeat, instead choosing to heap praise on Federer.
"I think it is not the right moment to talk about that," he said. "Everybody saw the match yesterday, so everybody's free to make up their own opinion.
"But I'm not going to say I lost the match because I was tired.
"What I'm going to say, and what I feel, is I lost the match because I played against a very good Roger Federer on one of his favourite surfaces.
"And when he's playing like this, it is very difficult to stop him.
"I had little chances, I was there, but it wasn't enough. He played unbelievable. I think in the beginning he was unplayable.
"I just can congratulate him for his victory and another great tournament for him."
It may have been a mediocre year by Federer's own standards, but at least it started and ended on a high.
And hey 66 titles is nothing to cry about either ;).
Looking better then ever Federer was on fire beating, Murray, Soderling, Djokovic and of course Nadal on the way to victory.
And the press says this guy has no motivation.
Near retirement my butt!. As always R. Fed is here to stay. Now I'm really sorry I didn't watch the whole tournament.
I'll have to go back and find those matches.
If Federer plays like this next year we're gonna be in for a treat.
But for now, Roger is off on a well deserved vacation. Rest up Roger. See you in Australia in 2011!.