The South Korean sensation, 21, struggled with blisters on his left foot and had to undergo treatment in the second set.
There was a six-minute break in play while Chung sat courtside with his foot lofted in the air for medics to remove plasters.
In the end, it proved his undoing. So often movement is his strength but he struggled to cover the ground and make balls he normally would so easily get.
With the scores at 6-1 5-2 and 30-30 in the eighth game of the second set, Chung approached the net and announced he was withdrawing.
The decision was then relayed to the crowd to a mixed reaction as disappointed fans jeered and sighed.
Eurosport commentator Simon Reed said: “Is he going to give it away? He is. What a shame.
“He obviously felt he couldn’t give it his best. I’m surprised, if it’s just blisters, that he’s not going to see it through to the end but only he knows how much he’s hurting.
“The crowd have a somewhat feeling but they saw Federer at his best for an hour.”
Chung waved goodbye to fans as he made his way off court with co-commentator Mats Wilander defending the decision.
He said: “He couldn’t move at all in the end and it must have been breaking apart underneath him.
“Even with blisters or cuts down his foot because of blisters you can really damage it and it can take a long time to heal.”
“Until you’re playing in a match situation you never really know. You’d have gone out and practised yesterday and you don’t move side to side at all with the same intensity.
“But wow, he played well Federer for the first 35 minutes.”
Speaking on court after the win, Federer said: “I thought the first set was kind of normal. I couldn’t tell what was going on to my opponent. I guess I was too focused in trying to protect the lead.
“In the second set I started to feel he was getting slower as he was fighting with the blister. I know he’s had problems with the blister for some time but I didn’t know how bad it was really.
“I have had blisters in the past a lot and it hurts a lot. At some points it gets too much and you can’t take it anymore when you realise you can’t come back and make things worse it’s better to stop,
“This one feels bitter-sweet. I’m incredibly happy to be in the final but not like this. He’s played such a wonderful tournament and credit to him for trying so hard today.”