Top seed Federer, whose rivalry with Nadal is one of the most storied in tennis history, had not beaten the Spaniard since he won a semi-final at Indian Wells in 2012 and had lost their last five matches.
The pair had not met across a net for 21 months, so there was an added sense of anticipation as Federer walked on court for his 12th final in his home city.
He survived a break point in his opening service game before grabbing the upper hand.
The Swiss broke twice to take the opening set and went about putting pressure on third seed Nadal at the start of the second, crafting a break point at 3-2 ahead.
Nadal, however, dug deep to stay in the contest and claimed his first break of the match for a 6-5 lead as Federer netted a backhand, leaving the Mallorcan to serve out to love.
The Swiss broke decisively to lead 5-3 in the third set and served out to take the title, the 88th of his career, after two hours and three minutes of battle.
"It was one of my best weeks in Basel, considering everything I've done throughout my career here," Federer told reporters.
"I thought the match was close. I had my chances in the second, but he fought back well, like he's done throughout the week really. Overall, I was really happy how I played and it was a very special day."
Nadal, who has enjoyed a return to form after a relatively poor year by his standards, fell just short of claiming only the second indoor hard court title of his career.
"My goal is to get back to my level and be competitive against the top players again and today I was very competitive against one of the best players in the world," he said.
"The match wasn't far away from me."
Seventeen-times grand slam champion Federer now trails Nadal 23-11 in their head-to-head series.
Both men will head to France for next week's Paris Masters before the ATP World Tour Finals in London.
(Reporting by Toby Davis; Editing by Ed Osmond)
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