Federer, seeded fourth, snapped a three-match losing streak to the second-seeded Nadal with a 6-3, 6-0 victory in 61 minutes.
Federer improved to 2-0 in Group B play and is assured a berth in Saturday's semifinals. He's looking for a record sixth Tour Finals championship. Nadal will play Jo-Wilfried Tsonga on Thursday to determine the other group semifinalist.
Tsonga kept his title hopes going with a 7-6 (7-4), 6-1 win over Mardy Fish, who is 0-2 in group play.
Federer last beat Nadal in the World Tour Finals title match last year but dropped all three of their previous meetings in 2011. He established an edge Tuesday with a break in the sixth game of the first set and then dominated the second.
Federer lost only nine points -- two on serve -- in the second set in running away with the win.
Tsonga was nearly as strong in his second set versus Fish. After the tiebreak win, he piled up three breaks in the second set as Fish managed to take just five points on serve.
Third-seeded Andy Murray pulled out of the tournament with a groin injury, promoting Janko Tipsarevic to the Group A main draw. Tipsarevic will play Tomas Berdych Wednesday. Top-seeded Novak Djokovic and world No. 5 David Ferrer, who each won matches Monday, are paired against each other in Wednesday's other match.