Nadal hasn't played an ATP event since the Wimbledon Championships, when he lost in the second round. It was later learned that Nadal had a partially torn patella tendon in his left knee.
Nadal earlier said he wouldn't be playing until an exhibition in late December in the United Arab Emirates but it wasn't until Thursday that he formally pulled out of the Tour Finals and also next week's Paris Masters.
"It's disappointing for me to miss the last two tournaments of the season in Paris and London but it doesn't come as a surprise," Nadal said. "I will hopefully resume my tennis practice soon since I am making good progress with my recovery from injury.
"I am not ready to compete in time for these events so I will continue my recovery in Mallorca and work hard to be back as soon as possible."
Nadal is one of six players who have qualified for the ATP World Tour Finals, an eight-player invitational event. His withdrawal leaves three spots open with two weeks before the Tour Finals in London.
Prior to his injury, Nadal won four tournaments in 2012, including his seventh French Open title. He was the runner-up to Novak Djokovic at the Australian Open.