Andy Murray and Gilles Simon will meet in the final. Simon upset Nadal 3-6, 7-5, 7-6 (6), and the fourth-ranked Murray beat Federer 3-6, 6-3, 7-5 to prevent what would have been the fifth Nadal-Federer final this season.
Once Federer lost in the earlier match, Nadal was guaranteed to become the first Spanish player in the Open era to end the year as No. 1.
Simon will attempt to win his fourth title in 2008, thanks to excellent shot-making throughout the final set, which was marked by long rallies and replay challenges -- including the final point, when Hawkeye confirmed that Nadal's shot sailed long.
Simon saved 17 break point chances -- including seven in the third set -- in a match that lasted nearly 3½ hours.
The 16th-ranked Simon won at Bucharest, Casablanca and Indianapolis earlier this year.
Simon had saved match points against three of his previous four opponents, but the Frenchman's powerful, low groundstrokes troubled the top-ranked Nadal enough that he didn't have to do it a fourth time.
Nadal broke the tiring Simon in the sixth game before also dropping serve. Simon broke again in the 11th when one of Nadal's 55 unforced errors sailed wide, but the Spaniard rallied to force the tiebreaker.
The first semifinal was a rematch of the U.S. Open championship, which Federer won. This time, Murray broke the second-ranked Federer in the final set on his seventh break point chance to reach his second Masters Series final this season. The Briton won at Cincinnati.
Murray had squandered six break point chances in the third set. Finally, Murray's deep backhand forced Federer's forehand long.
"Against Federer, you just have to ask yourself: 'Do I go for it and take a chance or sit back and wait?' " said Murray, who improved to 3-2 against Federer. "It was a great hit and probably the most important of the match."
More than half of Murray's 33 winners and eight of his 14 aces came in the final set, in which he wore Federer down with serves to his forehand.
"It worked, didn't it?" Murray said. "He missed a lot more [today] since I think he wasn't expecting it."
Federer, who cruised through the draw following a five-week layoff, has won a Masters Series title every year since 2002. He has only Paris and Shanghai left to earn his first of 2008.
"It's a frustrating loss because there's not a whole lot you can do, because the serving was so good today," Federer said. "I feel like I'm playing well. I'm moving well. That's the way I want to feel."
Federer attacked from the start. That aggressiveness helped him break in the sixth game when the Briton fired long with Federer crowding the net, one of Murray's 41 unforced errors.
Federer's serve, so effective in Friday's quarterfinal victory over Juan Martin Del Potro, was steady in the first set, and it helped save a break point in the seventh game.
"Against Roger, when you go behind he's very difficult to play because he gets confident," Murray said. "I hit some more winners."
Federer sat back and pushed Murray out wide, but Murray ran down most of the shots. He also came to the net more often, breaking Federer with a volleyed winner to lead 3-1 in the second set.
"I felt like if I served well today I had a chance, and I definitely did that in the second and third set," Murray said.
Federer's dominant forehand saved a triple-break chance in the third game of the final set. He then watched as Murray's backhand landed wide of the line to save a double-break chance in the fifth game.