
Djokovic, world number three with Masters trophies in 2007 from Miami and Montreal, was unable to make an impression in the one-hour, 40 minute contest which saw the South American through to his first final in nearly a year and a half.
Nalbandian will play on Sunday against either top seed Roger Federer, the defending champion, or surprise challenger Nicolas Kiefer of Germany.
"Djokovic is a player who moves very well, it's very difficult to break his serve," said Nalbandian. "It's tough to know what he's going to do.
"I just tried to hang in throughout the match and play my game."
Nalbandian, ranked 25th, has had little to show this season, managing a Barcelona quarter-final in April but staying well under the radar.
The former Top five standout played the Madrid semis a year ago and in 2005 and also finished runner-up to Marat Safin three years ago.
Djokovic was on a 10-match win streak, including two Davis Cup rubbers and last week's title in Vienna indoors. The 20-year-old lost the US Open final to Federer.
Djokovic, winner of five titles in 2007, had been looking to enter his eighth final of the season.
"Today I felt really exhausted. It came after a long two weeks, playing day after day. I wasn't fresh today as i could be," said Djokovic.
"He deserved to win, he played better," said the Serb. "It happens, sometimes you play bad.
"He was the better player, we have to turn a page."
Nalbandian needed only one early break to control the 44-minute first set and kept up the pressure in the second.
Djokovic recovered from 0-30 in the 11th game for 6-5, but Nalbandian did the same, saving a set point to bring on a tiebreaker.
Nalbandian's heavy game came into prominence, with the Argentine racing out to 5-2 and reaching four match points. Djokovic saved two but couldn't touch a Nalbandian service winner on a third.
Djokovic struck 23 unforced errors and was unable to convert on either of his two break points.
Nalbandian has re-discovered his game after 14 months without a coach after taking on Martin Jaite over the summer.