The first-round exit was 2009 champion Nadal's first at Melbourne Park and only his second at a grand slam.
Down 2-0 in the final set, Verdasco dragged himself off the canvas with a barrage of booming forehand winners, breaking Nadal twice to storm to a 5-2 lead.
He broke his compatriot a third time, sealing the match with a cross-court winner that left the Rod Laver Arena crowd stunned late in the day session.
"I just hit everything. I think I played unbelievable in the fifth set from the break," Verdasco said in a courtside interview.
"I just started hitting winners. I don't know how. I was closing the eyes and everything when I was coming in.
"I kept doing it so it went well."
After shaking hands with his opponent and the chair umpire Nadal strode quickly off the court, barely pausing to acknowledge the crowd with a wave.
