The Spanish ace entered the London tournament as the favourite thanks to his world number one status following a strong showing in 2017.
Nadal pulled out of the recent Paris Masters due to a knee problem to raise concerns about his fitness ahead of the event.
However, the 888sport tennis betting odds suggested Nadal was still fancied to win the ATP World Tour finals for the first time.
The 30-year-old was forced to dig deep in his opening game at The O2 but Nadal lost to David Goffin 7-6 (7-5) 6-7 (4-7) 6-4 in two hours and 37 minutes.
Although Goffin came into the tournament following a brilliant 2017 that yielded two ATP titles at Tokyo and Shenzhen, Nadal was still fancied to beat the Belgian.
However, the seventh seed broke Nadal’s serve in the third game to raise concerns about the Spaniard’s fitness in front of a packed audience at the London landmark.
The 26-year-old, who is the world number eight, managed to see out a closely-fought match that involved two tiebreakers to make a winning start to the end-year event.
Nadal, on the other hand, decided to call time on his season following a laboured performance where he battled through a knee problem to put on a valiant show.
“I know during the match. It is not a decision I take five minutes ago. It ois a decision that I made during the match,” Nadal told his media conference.
“Even winning, even losing, I was going to pull out because I was not enjoying on court at all. It was not fun to play like this. I really believed
that I don’t deserve after this great season to spend two more days on court with this terrible feelings. That’s all.”
He added: “I am, of course, disappointed. But I am not going to
cry. I had a great season. I really appreciate all the things that happened to me during the whole season. Thanks life for this unforgettable one.
“I am going to work hard to try to give me more chances the next season to keep being at the top and fighting for the most important things.”
Nadal has now withdrawn from the ATP World Tour finals seven times in 13 years and he will now be replaced by fellow Spaniard Pablo Carreno Busta.
MORE: The latest football news
MORE: The latest tennis news
BIOGRAPHY: Daniel Sturridge
BIOGRAPHY: Kepa Arrizabalaga