Federer, the most successful player at the year-end championship with six titles, equaled Ivan Lendl's record of 12 semifinal appearances in winning his group ahead of Japanese debutant Kei Nishikori.
"I knew I was qualified, so maybe I went in a bit more relaxed," Federer said. "It's not the way I thought it was going to go, but there's always next year for Andy."
It was a ruthless win for Federer, and humiliation for Murray, who last won only one game in 2007 at Miami, against Novak Djokovic.
"It was a tough night. I've lost slam finals and stuff, which has been very tough," Murray said. "But in terms of the way the match went, it was not ideal from my side of the court, far from it."
In the other group, Djokovic will be guaranteed the year-end No. 1 ranking for the third time in four years if he beats Tomas Berdych on Friday. Going into the last round-robin matches, all four players can still make it to the semis; US Open champ Marin Cilic takes on Australian Open champ Stan Wawrinka.
Before playing Murray, the second-seeded Federer had already secured a semis berth after Nishikori defeated David Ferrer 4-6, 6-4, 6-1 in the afternoon. That left Murray needing to defeat the 17-Grand Slam champion in straight sets to make it to the last four at the O2 Arena and thwart Nishikori.
But Federer, yet to drop a set, made a perfect start, losing only eight points in a 23-minute first set without even serving well.
Murray, who fought hard this autumn to qualify for the season finale, continued to struggle in the second set. Federer opened a 5-0 lead and moved 30-0 up on Murray's service but missed an easy volley before the Scot managed to hold to salvage some pride, and give British fans a cheer.
"If I played well, he probably still would have won anyway," the fifth-seeded Murray said. "He was striking the ball very, very clean. After the first few games of the match, he played exceptionally well. Made very few mistakes. Was hitting the ball off the middle of the racket on serve, returns. He maybe didn't hit his first serve as well as he can, but apart from that, everything else was very clean."
Nishikori, the US Open runner-up, is one of the three debutants at the tournament. He was rapt to advance at Ferrer's expense.
"The final set was almost perfect," said Nishikori, who hit 41 winners and won 80 percent of his first-service points.
The Spaniard, who replaced the injured Milos Raonic at the last minute, took advantage of Nishikori's 18 unforced errors in the first set and made the decisive break in the 10th game when the Japanese player netted an easy smash.
But Nishikori recovered to break at the start of the second set and served out to even the set score, making it the first match at the tournament to go to three sets following eight one-sided encounters.
The fourth-seeded Nishikori won four consecutive games to start the third, and saved five break points in the sixth game before winning it with a drop shot.
Ferrer missed out on qualifying for the ATP Finals after his loss to Nishikori in the Paris Masters quarterfinals last month. He said stepping in for Raonic at the last minute did not pose a problem despite articular problems in his back.
"My condition was perfect today, Kei was just better," said Ferrer, the 2007 runner-up.
The seventh-seeded Raonic withdrew with a muscle injury after losing his two group matches in straight sets.