The world No. 2, who had scraped past American Mardy Fish in his first match before being trounced by Swiss arch-rival Roger Federer, was outplayed for most of his Thursday night contest against an opponent who threw caution to wind and treated the crowd at London's O2 arena to a series of thrilling winners.
After some early nerves at the start of the match, when his aggressiveness led to several unforced errors, Tsonga settled down and began attacking Nadal's backhand and looking for chances to move forward and win points at the net, frequently complementing his impressive power with exquisite drop volleys.
Nadal, as he was in Tuesday's lopsided 6-3, 6-0 defeat against Federer, found himself merely reacting to an opponent intent on controlling the points with his big serve and powerful forehands and keeping the rallies short.
In the first set, the Spaniard managed to stave off the only two break points he faced and - despite making no impression on Tsonga's serve - stay afloat until the tiebreaker.
But it was at that juncture that Tsonga seized control of the match with aggressive play, dominating the Spaniard in all facets to move within one set of the semifinals.
In the second set, Nadal continued to control his service games and then evened the match when Tsonga gifted several points - and eventually the set - with a slew of unforced errors in the 10th game.
But just when it appeared the 10-time Grand Slam champion might be gaining some confidence and establishing some consistency to his game, the wheels fell off and he dropped serve three times in the final set, including in the final game of the match.
Tsonga managed to finish the contest off in style with one final big forehand out of the Spaniard's reach.
"Tonight I just played well, amazing tennis," Tsonga said in the post-match press conference.
"I don't know if Rafa played really well. But, anyway, he fought to come back. This is what champions do every time. I was really aggressive. I had a good percentage of winners. I put a lot of pressure on him today."
The Spaniard, meanwhile, rued his inability to lift his game and stymie Tsonga's aggressive tactics.
"I think I didn't play well tonight. The first two sets I didn't play bad, but I didn't play well, and to win these kind of matches you have to play well," Nadal said.
"I played without anything special tonight. If the two first sets weren't good, the third was a disaster. That's the truth. He's a dangerous player. For sure it is not easy to play against him, big serve, aggressive player. To play against these kind of players, you have to do something else more, and I didn't."
Nadal had arrived in London with doubts surrounding his fitness and some rust after taking a five-week break from tournament play and he never seemed comfortable at this indoor hard-court event, whose fast conditions do not suit his counter-punching style.
Despite the disappointing result, the Spaniard has one more chance to put an exclamation point on his 2011 season when he returns to his favored red clay to lead his country in the Davis Cup final next week against Argentina.
Countryman David Ferrer, who will be Spain's other singles player in Seville, remains alive in London and has already assured himself of a spot in Saturday's semifinals.
He will play Czech Tomas Berdych in his final round-robin match on Friday.
The Barclays ATP World Tour Finals, a year-end event limited to the top eight players in the ATP rankings, is regarded as the fifth-most prestigious tournament on the men's tennis calendar after the four Grand Slams.