The loss is also Nadal's first on clay in two years and has ended his 37-match unbeaten streak on the surface. Nadal's last loss on clay came way back in May, 2009 when Robin Soderling got the better of him in the French Open fourth round match.
The victory marks Djokovic's third straight Masters 1000 trophies over Nadal.
Djokovic started of the match in a brilliant fashion to race to a lead of 4-0 with two breaks of Nadal. But the muscled Spaniard clawed his way back into the game and by the ninth game had already put Djokovic on the backfoot by 4-5.
Nadal then fought valiantly to save two set points in the tenth game, leveling for 5-5 before Djokovic stormed ahead by taking the first set on a net-cord winner. The second set was a more lopsided affair with Djokovic securing the win by a final break of Nadal. The Spaniard saved one match point but then hit the second one wide through a backhand.
A visibly upbeat Djokovic said, "I walked onto the court thinking I could win...I'm very happy with the way I played. This court was fast today, and I took advantage." And speaking about Nadal, he said, "It's always a pleasure playing you - you are a great champion."
Nadal on his part acknowledged Djokovic's victory and said, "I'll have to keep working to try and beat you...You are really off to a great start of the season."
The game lasted for two hours and 17 minutes and was attended by almost 15,000 spectators that also included the likes of Carlos Moya and Cristiano Ronaldo.