Blake was trying to become the first American to win an ATP title on European clay since Andy Roddick in 2003 at St. Poelten, Austria.
Blake had defeated Nikolay Davydenko 6-7 (3), 7-6 (2), 6-3 in the semifinal Sunday just hours before the final. The semifinal was suspended Saturday because of darkness with Blake leading 4-2 in the second set.
In the final, the fourth-seed Blake broke for the first time in the 12th game of the first set.
Montanes, who defeated Paul Capdeville 6-3, 6-4 in the semifinal Saturday, broke Blake at love in the seventh game of the second set. Blake immediately broke back and then wasted two match points in the 10th game before losing in the tiebreaker.
In the third, Blake lost all three of his service games.
Blake earned his seventh straight win over the second-seeded Davydenko, who was playing his fifth tournament of the year after a two-month layoff because of a heel injury.
Three of the opening five games produced breaks of serve, with Davydenko winning two before Blake comfortably won the tiebreaker.
Blake broke in the fourth game of the deciding set, becoming the first American since Todd Martin in 1999 to reach the Estoril final.
Montanes' victory was the second of his sixth ATP finals and his first since July, 2008.