The Serb, who lost the top ranking to Nadal last month, won 6-3 6-4 at the O2 Arena in London.
Djokovic, 26, extended his unbeaten run to 22 matches as he claimed the season-ending title for the third time.
He will now head to Belgrade, where Serbia take on the Czech Republic in the Davis Cup final from Friday.
Analysis
Image of Tim Henman
Tim Henman
Former British number one and BBC Sport expert
"Djokovic stamped his authority on the final in the first three games by hitting the ball and moving so well. Rafa came back into it but it was a match too far for Rafael. He deserves to be world number one but indoors Djokovic remains the man to beat."
Nadal might have earned the year-end number one ranking after his remarkable return from injury in February, but Djokovic denied him a first ATP Finals title and laid down a marker for battles to come in 2014.
"It's the highest quality of tennis that you have next to Grand Slams, because every match that you play, you play against a top 10 player every second day," said Djokovic. "Especially this year, with back to back Paris Bercy tournament and London, wasn't easy for sure.
"I am very proud of the way that I managed to recover and perform better and better as the tournament went on.
"I had the tough three setters against all of the opponents in my group, and then I managed to raise the level of tennis in the semi-finals and finals when it mattered the most."
Nadal paid tribute to the crowd for the vibrant atmosphere they created.
"This is probably one of the best seasons of my career and playing this match in this stadium is just fantastic for me," said Nadal.
"Thanks to all the crowd for all the support, not only today but around the week and all the crowd that supported me. See you next year."
Always the happier of the two playing indoors, the pace and depth of Djokovic's returns in particular put pressure on Nadal and played a major part in the Spaniard double-faulting four times in the opening set.
In a blistering start, Djokovic was one point from going 4-0 clear as he stood up to the baseline and returned Nadal's firepower with interest.
However, a missed backhand on break point let the Spaniard off the hook, and Djokovic's game briefly deserted him.
An unexpected sliced backhand from Nadal caught the Serb off guard and drew an error that allowed the top seed back into the set, but Djokovic gathered himself to hold for 4-3 and then launched another assault.
Match stats
Nadal Djokovic
1
Aces
6
4
Double faults
0
73
1st serve %
65
57
1st serve win %
68
50
2nd serve win %
70
1/3
Break points
3/11
9
Winners
19
23
Unforced errors
21
Two double-faults from a nervous Nadal opened the door and a stinging forehand return onto the baseline endangered the Spaniard's toes, before Djokovic broke with a breathtaking example of his ability to turn defence into attack.
With Nadal bearing down on the net to finish the point, Djokovic chased to his right and lifted a beautiful lob over his opponent, before moving in and angling away a volley.
A clenched fist and a roar let everyone know just how big a moment Djokovic thought that was and, thanks in part to a kindly net cord at 15-30, he closed out the set in the following game with an ace.
Nadal, 27, might have won three of his five meetings with Djokovic this year but the Serb won comfortably last time out in Beijing, and when the Spaniard began spraying forehands early in the second set, a repeat looked on the cards.
Djokovic converted his third break point for a 2-1 lead with yet another deep return that Nadal could not handle, and he had two points to break for a fourth time.
Nadal clung on, pumping his fist to show he was still up for the fight, but Djokovic has made the O2 Arena a fortress over the last two years and he moved untroubled towards a 10th straight win at the venue.
One match point slipped past on the Nadal serve and another on his own, but Djokovic got the victory he so desperately wanted to end his season on a high when the world number one blazed a forehand wide.
There was success for Spain in the doubles, though, and for the second straight year, with Fernando Verdasco and David Marrero beating Bob and Mike Bryan to follow in the footsteps of Marcel Granollers and Marc Lopez.
The Bryan brothers were going for their 12th title of a season that saw them come within two victories of a calendar Grand Slam.
But they were edged out on a match tie-break, with Verdasco and Marrero winning 7-5 6-7 (3-7) 10-7.
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