It was a case of third time lucky for the Dutch-Croatian fifth seeds, who lost their first two finals, in Marseille and at the US Open, earlier in the year.
The Spaniard, who has never won the elite eight-man event, was beaten 3-6, 7-6 (7/4), 6-3 by in-form Russian Daniil Medvedev, who will play Dominic Thiem in Sunday's final.
ATP Finals 2020: Daniil Medvedev overcomes Rafael Nadal in thrilling semi-final, sets up title clash against Dominic Thiem
Nadal, who has never won the elite event in his illustrious career, faltered when serving for the match in the second set and was beaten 3-6, 7-6 (7/4), 6-3.
Novak Djokovic, five-time winner finishes second in Group Tokyo 2020 behind Medvedev and will play third-seed Dominic Thiem in the semi-finals on Saturday.
ATP Finals 2020: Nadal earns hard-fought win over Tsitsipas to reach semi-finals; Rublev downs Thiem in dead-rubber
Nadal, whose haul of 86 singles titles includes just one on indoor hard courts, is chasing the biggest prize missing from his resume at the eight-man elite event.
International travel to Australia is still tightly controlled and all overseas arrivals must quarantine for two weeks, while individual states also have their own COVID-19 restrictions.
ATP Finals 2020: Medvedev downs Djokovic to reach semi-finals; Zverev keeps hopes alive after beating Schwartzman
Daniil Medvedev secured a spot in the semifinals of the season-ending tournament by dominating five-time champion Novak Djokovic 6-3, 6-3 Wednesday for his second straight win of the group stage.
ATP Finals 2020: Dominic Thiem secures victory over Rafael Nadal; Stefanos Tsitsipas outlasts Andrey Rublev
Nadal, who lost the 2010 and 2013 finals of the event, has to beat Tsitsipas in his last group match to reach the semi-finals of the prestigious season-ending tournament.
The world number one wobbled at the start of the match against the diminutive eighth seed, making his debut at the elite eight-man event but recovered to win 6-3, 6-2.
ATP Finals 2020: Rafael Nadal outclasses Andrey Rublev in straight sets; Dominic Thiem beats Stefanos Tsitsipas
US Open champion Thiem stumbled after winning the first-set tie-break but found his range again to win 7-6 (7/5), 4-6, 6-3 and seize the early initiative in Group London 2020.
ATP Finals 2020: Novak Djokovic vies for sixth crown, Rafael Nadal first as London hosts final year-ending tournament
London hosts its 12th and last ATP Finals tournament headlined by Novak Djokovic and Rafael Nadal but with empty stands. The Serb is seeking a sixth title while the recently crowned French Open winner Nadal is going for his first.
Djokovic said the biggest concern was the unpredictability of the 2021 calendar, with decisions taken out of the hands of the sport's administrators as a result of Covid-19.
Novak Djokovic voices fears over uncertain future for lower-ranked tennis players amid COVID-19 pandemic
Novak Djokovic said the biggest concern was the unpredictability of the 2021 calendar, with decisions taken out of the hands of the sport's administrators as a result of COVID-19.
Alexander Zverev says picture painted by former partner is 'not who I am,' apologises for effect of allegations on tennis
Former junior player Olga Sharypova said in a social media post last month that the German world number seven had tried to "strangle" her while at last year's US Open.
The season-ending ATP Finals will be played at the O2 Arena in London for the last time this year. We look at the participants, the schedule and history of the tournament in London.
ATP Finals 2020: Rafael Nadal in same group as defending champion Stefanos Tsitsipas, US Open winner Dominic Thiem
World number one Novak Djokovic will face Daniil Medvedev, Alexander Zverev and Diego Schwartzman in the group stages of the final edition of the tournament in London before it moves to Turin next year.
Medvedev's first final since last year's ATP Tour Finals saw him come from a set behind to beat Alexander Zverev 5-7, 6-4, 6-1 at Bercy Arena on Sunday.
Paris Masters 2020: Rafael Nadal through to semi-finals in comeback win, Diego Schwartzman books maiden ATP Finals place
Nadal claimed a 4-6, 7-5, 6-1 victory over Pablo Carreno Busta, ending his fellow Spaniard's hopes of qualifying for the season-ending tournament in London.
Paris Masters 2020: Rafael Nadal romps to 1000 Tour-level wins; Diego Schwartzman inches closer to ATP Finals debut
The 28-year-old Schwartzman was too strong for France's Gasquet, taking a 7-5, 6-3 victory, and will next face Spanish qualifier Alejandro Davidovich Fokina in the last 16 at Bercy Arena.
Football, rugby, tennis and horse racing are among the other sports that will benefit from high-profile events being allowed to continue behind closed doors.