Nadal overcame fellow Spaniard Tommy Robredo 6-3, 3-6, 7-5, breaking twice in the last three games.
Novak Djokovic and defending champion Jo-Wilfried Tsonga enjoyed more routine wins, U.S. Open champion Juan Martin del Potro saved seven match points and 2006 champ Nikolay Davydenko lost but secured one of the two last spots in the ATP World Tour Finals in London this month.
The fourth-seeded Murray couldn't overcome a lack of sleep following his three-set win over James Blake that ended at 1:45 a.m. on Thursday.
"It's obviously limited recovery after a long match," Murray said. "It's 4 a.m. by the time you get to bed. So it's not perfect preparation for a match. But you still come out and you try and give it your best shot. Wasn't good enough."
After dominating the first set, Murray was broken early in the second and never recovered. Stepanek, a Paris finalist in 2004, gained a quarterfinal matchup against fifth-seeded Del Potro.
He and Fernando Gonzalez were at 6-7 (6), 7-6 (6) when Gonzalez retired just before 1 a.m. because of pains in his right knee.
Murray won his sixth title of the season last week in Valencia, where he returned to the tour after a six-week layoff with a wrist injury.
"I played seven matches in the space of eight or nine days and that was exactly what I needed at this stage of the season after having a break," he said.
Robredo broke Nadal to lead 5-4 in the third set and looked set to claim his first win in six meetings with Nadal, but he missed two easy forehands to let the former No. 1 back in the game.
Nadal, who staved off five match points in the previous round, held serve then broke Robredo again for the victory. Nadal, who lost in the Paris final two years ago, will face Tsonga in the quarterfinals.
Tsonga needed only 52 minutes to beat fellow Frenchman Gilles Simon 6-2, 6-3 and can still grab the eighth and last available spot in London. Tsonga never faced a break point and broke his opponent's serve three times.
"I'm not thinking about London," said Tsonga, who had 13 aces. "I'm thinking about defending my title."
Simon injured his right knee against Ivan Ljubicic in the previous round and was hampered from the start.
French Open finalist Robin Soderling also has slim hopes of qualifying for the ATP finals following his victory over sixth-seeded Davydenko by 6-3, 3-6, 6-4. Despite his loss, Davydenko secured his place when seventh-seeded Fernando Verdasco lost to Marin Cilic 3-6, 6-3, 6-4.
Soderling's next opponent will be third-seeded Djokovic, who defeated French qualifier Arnaud Clement 6-2, 6-2.
"I was moving better [than Wednesday]," said Djokovic, who is coming off a win over top-ranked Roger Federer in the Swiss Indoors final. "I was using the chances to go to the net and to make some winners when they were given to me."