Nadal fought tooth and nail in his opening group-stage encounter with Goffin, losing a first set tie-break but redeeming himself by winning the second, saving four match points along the way.
However, his body began to let him down in the decider and the Belgian was able to capitalise, sealing a 7-6, 6-7, 6-4 victory over the world No 1.
Nadal pulled out of the tournament in his post-match press conference, confirming that he would attempt to return for the beginning of the 2018 season.
His appearance at the World Tour Finals was originally in doubt after he skipped the Paris Masters.
“I knew during the match,” Nadal said.
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“It is not a decision I took five minutes ago.
“It is a decision that I took during the match. Even winning, even losing, I was going to pull out because I was not enjoying on court at all.
“It was not fun to play like this.
“I really believed that I don’t deserve after this great season to spend two more days on court with these terrible feelings.
“That’s all.”
Roger Federer is now a clear favourite to seal a seventh ATP World Tour Finals title although doing so will not allow him to overhaul Nadal at the top of the world rankings.
The Spaniard was confirmed as the oldest ever year-end world No 1 in Paris and received the trophy for the achievement on Sunday.
And last night he was keen not to let an injury-hit ending to the season colour a year in which he has also won two more Grand Slam titles.
“I am, of course, disappointed,” Nadal added.
“But I am not going to cry. I had a great season.
“I really appreciate all the things that happened to me during the whole season.
“Thanks life for this unforgettable one.
“I going to work hard to try to give me more chances the next season to keep being at the top and fighting for the most important things.”