Nadal had won his previous 18 matches and 25 sets in a row at Monte Carlo.
But the Spaniard came up against an inspired Fognini, who delivered his best performance of the season.
Nadal was broken six times as Fognini went on the offensive throughout the match.
By his usual high standards on clay, Nadal was disappointing, winning just 44 per cent of points on his first and second serves.
And he pulled no punches in his assessment of how he played.
Nadal said: “I played a very bad game against a good player, so in that situation, you have to lose.
“That’s what I did this afternoon.
“No, was a bad feeling. Was a tough day and was a difficult opponent.
“I am coming from low moments in terms of injuries, and in terms of the mental side have been not easy to accept all the things that have been going on during the last times.
“So just was this kind of day that everything was wrong. I probably played one of the worst matches on clay in 14 years.
“So when that happens, you have to lose.
“And today I deserve to lose because I played against a player that was better than me today.”
Meanwhile, Amazon Prime pundit Daniela Hantuchova feels it is good news for tennis that Nadal lost.
“It is great news for everyone because it makes our sport so much more interesting,” Hantuchova said.
“It is really hard to predict anything from now on.
“If we were so sure how this tournament was going to go and we were completely wrong. We can’t predict anything for the future.
“It just makes it so much more exciting for the fans, they all wanted Fabio to win.”