The 2001 champion, Hrbaty improved to 18-4 in Auckland, the best record of any player in the modern era.
The 26-year-old Slovakian is 10-0 this year after winning in Adelaide last week.
Hrbaty has played in three of the last four finals here and is the first two-time winner in Auckland since Tim Wilkinson, who captured the crown in 1979 and 1982.
Hrbaty took a 4-2 lead over his teenage opponent, but Nadal went on a four-game run to claim the first set.
The 17-year-old Spaniard went up, 2-1, in the second set before Hrbaty won the next four games.
Nadal, who eliminated second seed Jiri Novak and No. 4 Sjeng Schalken, was playing his first ATP championship match.