Nadal, who will reclaim the world number two ranking on Monday, clinched a record-breaking 18th career Masters title, beating Federer 6-4 7-6.
The win also made him the first man to claim three major clay titles prior to the start of Roland Garros.
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Federer beat Nadal in last year's final before going on to claim the French Open and Wimbledon crowns and snatching back the world number one ranking from the Spaniard.
Nadal now heads to Paris with all guns blazing as he bids to wipe out last year's fourth-round loss to Soderling and resume his trophy chase.
Sunday's eagerly-anticipated match in a packed and rowdy Magic Box arena graced by Spanish Queen Sofia was their first meeting since the 2009 title match.
Home win 'a dream' for Nadal
It sets Nadal up for a run at regaining his Roland Garros crown when the grand slam starts next Sunday.
Nadal brought the partisan crowd to their feet when he took the first set and the noise reached ear-splitting levels as their hero fought back from 4-2 down before throwing himself face down on the clay.
"Winning here at home is a dream," said Nadal, who took titles over recent weeks in Monte Carlo, Rome and Madrid.
"Never in my wildest dreams did I imagine I would win all three of these big events," added the Spaniard, unbeaten this clay season with 15 consecutive victories.
Nadal, now with 39 titles to his name, leads Federer 14-7 in career meetings, winning ten of their last 12.
Missed chances for Federer
He now stands 28-2 in claycourt finals, his two losses coming at the hands of Federer, including Madrid a year ago.
Federer missed out on chances repeatedly in the final, which lasted just over two hours, converting on only one of seven break points in an hour-long opening set.
In the second, the world number one twice recovered from a break down and once into the tiebreaker, took a 4-2 lead.
But four consecutive unforced errors meant a wasted effort, with Nadal claiming victory on his second of three match points, a Federer mis-hit.
"It's been a wonderful event for me," said the Swiss. "I'm sorry I couldn't defend the title. Rafa's had an incredible clay season, he was supreme today.
"I'm looking forward to Paris, I'm happy with my claycourt game, I know I'm not Spanish but I tried to play some clay court tennis here."
