(AFP/Valery Hache)
The world number one had been a doubtful starter this week with an injured ankle but played through the pain to lift his first trophy in the principality, the 37th of his career and 14th at the Masters 1000 level.
It was also a huge psychological boost ahead of next month's French Open where Nadal is a record seven-time champion.
Nadal had reigned supreme at the Monte Carlo Country Club since his last loss in 2003, when he was still a teenager, and had won every edition since 2005.
Djokovic, who achieved the win in one hour, 51 minutes, was overwhelmed to have beaten the king of clay.
"It's such a great pleasure to win here, it's very special," said the Serb who is based in the principality.
"I live here and love this event Rafa, it was a pleasure again, thanks for allowing me to win here at least once," he joked during the trophy ceremony.
"I can't ask for a better start to the clay season."
The winner admitted that the ankle he rolled earlier this month had been a huge concern.
"I didn't know if I could be a part of this year. But I made the decision to play -- and it was the best decision I've made in my life."
Nadal, who returned to tennis in February after seven months out with a knee injury, stands 38-6 in clay finals, losing to only three players -- Djokovic (three times) Roger Federer (twice) and Horacio Zeballos (once).
Before the final, the Spaniard had lost only one set all week after playing in his fifth straight final since his return to the circuit.
"What Novak is doing is just amazing," said the losing finalist.
"Congratulations for winning my favourite event and all the best for the rest of your season.
"Last year was especially hard for me, but I had the support of my team and my fans. That was a very positive energy for me and gave me motivation to play here again."
Djokovic ran away to a 5-0 lead at the start of a match delayed for almost an hour by rain.
But Nadal would not roll over, saving seven break points -- five in the sixth game as he finally got on the scoreboard.
Djokovic earned the set after 47 minutes from a Nadal double-fault in the eighth game.
The Spaniard looked like turning it around with a break in the second set which gave him a 4-2 lead.
Djokovic calmly clawed it back with his precision shotmaking, levelling at four game apiece, but losing serve in the 11th game from a backhand wide.
The Serb, who came to the final with titles at the Australian Open and Dubai, broke back for 6-6 through a backhand winner to force the tiebreaker.
He ran away with the decider, seizing the win on the first of five match points with a forehand winner to the corner.
Djokovic becomes the first player to beat Nadal three times in a clay court final.
The winner claimed his first Monte Carlo title after losing the 2009 and 2012 finals to the Spaniard.
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