The 17-time Grand Slam champion was set to make his comeback from a two-month absence at last week's Paris Masters but withdrew, citing an abdominal strain, but had hoped to feature in the season finale.
Nadal did win the Rogers Cup in Toronto this season, but he has otherwise endured nothing but misery in this year's biggest hard-court events.
"I did everything possible to be able to reach the end of the season in good condition, both for Paris and for London, doing things well and remaining keen to play".
He was forced to retire mid-way through his US Open semi-final with Juan Martin Del Potro in September due to pain in his right knee and has not been able to play a competitive match since.
John Isner will replace Nadal in the ATP Finals field.
An abdominal problem kept him out of Paris Masters last week, and he needs an operation on his right ankle.
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Rafa Nadal will not take part in the ATP Finals and waves goodbye to the rest of the season.
He added that he chose to have the ankle operation so he can start 2019 healthy.
The tennis player explained the problem had been detected "a while ago and it occasionally bothered me".
Meanwhile, reaching the final in London would rank alongside Anderson's US Open and Wimbledon final defeats against Nadal and Djokovic respectively as the most auspicious achievements of his career.
It means that Novak Djokovic, who returned to top spot in the world rankings today, is now guaranteed to end the year as number one as neither the injured Nadal nor Roger Federer, who is too far behind, can catch him.
He was dumped out of the French Open as the 20th seed at the quarterfinal stage before embarking on a fine run.