French Open champion Nadal announced that an abdominal muscle problem, which prevented him from playing in the Paris Masters last week, and ankle surgery had forced him to pull out of the season-ending event.
"Unfortunately I had the abdominal problem in Paris last week and I also have an issue in the ankle joint that has to be removed in the operating room today," the 17-times Grand Slam winner wrote on Twitter.
"This way I hope to be in full condition for next season."
American John Isner will take the 32-year-old's place in London when the Finals get underway on Sunday. Kei Nishikori has also been drafted in to replace Argentine Juan Martin del Potro who pulled out due to a knee injury.
Spaniard Nadal's withdrawal in Paris meant Djokovic returned to the top of the world rankings. The Serbian will become the first player since ATP rankings were introduced in 1973 to end the year at number one having been outside the top 20 during the same season.
"Reflecting on what I've been through in the last year, it's quite a phenomenal achievement," said Djokovic. "And, of course, I'm very, very happy and proud about it.
"Five months ago, if you told me that, I would be — I always believe in myself, but it was highly improbable at that time considering my ranking and the way I played and felt on the court."
Having missed the second half of the 2017 season because of his troublesome elbow, Djokovic returned at the start of this year but the injury flared up again at the Australian Open and he decided to have surgery on it.
He was dumped out of the French Open as the 20th seed at the quarter-final stage before embarking on a fine run.
Djokovic beat Nadal in a Wimbledon semi-final thriller before ending a two-year Grand Slam drought by defeating Kevin Anderson in the final.
A few weeks later he beat Del Potro in the final to win the U.S. Open and last month claimed the Shanghai Masters title without dropping a set.
"What Novak has achieved this season has to go down as one of the great sporting comebacks. It’s been a phenomenal return to form that would have been hard to imagine just six months ago," ATP Executive Chairman and President Chris Kermode said.
"He fully deserves his return to No.1 in the ATP Rankings and should be incredibly proud of his exceptional season."
Djokovic's dominant run ended on Sunday when he was beaten 7-5 6-4 by Russian Kharen Khachanov in the Paris Masters final.
(The story was refiled to correct paragraph six to clarify Djokovic did not start the year outside the top 20)
(Reporting by Christian Radnedge, editing by Ed Osmond)
