The grimacing Nadal was in trouble right from the second game, but despite repeated medical attention and a strapped left thigh he grimly battled to a 6-4, 6-2, 6-3 quarter-final loss.
Nadal's defeat comes on the exact anniversary of last year's injury pull-out in the quarter-finals against Andy Murray, which also came on Australia Day as celebratory fireworks lit up the Melbourne night sky.
"I hate retirements, so this wasn't the day to retire," an emotional Nadal said afterwards, explaining his decision to soldier on. "I did it last year. I hate that moment. I didn't want to repeat that."
The demise of Nadal, 24, halts his quest for the "Rafa Slam", a non-calendar year Grand Slam which would have united the four major titles for the first time since Rod Laver in 1969.
Nadal stands at nine Grand Slam titles and is the youngest man to win all four of the big tournaments. He said he thought he may have a small muscle tear, but added that it did not seem to be serious.
"This is one of the bad ones, one of the negative moments," he said. "That's part of the sport. I think I am a very, very lucky sportsman with what happened in my career."
"It's not possible be all the time at 100 percent," Nadal added. "It's not possible all the time to have all the positive factors together to win in every tournament."
Spain's Ferrer will face Andy Murray in Friday's semi-final after the British fifth seed outgunned rising star Alexandr Dolgopolov. Ferrer has a 3-2 winning record against Murray but has never beaten him on hardcourt.
Murray, last year's runner-up to Roger Federer, dropped his first set of the year against Ukrainian shot-maker Dolgopolov, 22, who dominated a third-set tie-break before going down 7-5, 6-3, 6-7 (3/7), 6-3.
Murray, 23, is now into his fifth Grand Slam semi-final as he bids to break a British men's major drought stretching back to Fred Perry's 1936 US Open win.
Earlier in the women's event three-time Grand Slam-winner Kim Clijsters beat Poland's Agnieszka Radwanska 6-3, 7-6 (7/4) to set up a heavyweight semi-final with world number two Vera Zvonareva, who downed Petra Kvitova 6-2, 6-4.
Zvonareva wore a black ribbon on her cap in mourning for victims of Monday's deadly suicide bombing at Domodedovo airport in Moscow, her home city, which killed 35 and left her frantically calling relatives.
The 26-year-old remains on course for her third straight Grand Slam final, after losing to Serena Williams at Wimbledon and Clijsters at the US Open in September.
Clijsters overcame a high error-rate to see off Radwanska, who played a limited game but stayed in the match with some scrambling defence, taking advantage of the Belgian's 37 unforced errors.
"Everything has to be better (against Zvonareva)," said Clijsters, who beat the Russian in September's US Open final. "I mean, serving, returning, the unforced errors. Everything has to be better."
World number one Caroline Wozniacki will face China's Li Na in Thursday's other semi-final, while defending champion Federer plays third seed Novak Djokovic in a mouth-watering men's last-four match-up.
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