Frenchman Tsonga, the world number 10, cruised to the opening set but lost the second and third on tie-breakers as his serve blew up dramatically, going out 1-6 7-6(4) 7-6(6).
The final four points were as follows: Tsonga double-fault, Nishikori ace, Nishikori ace, Tsonga double-fault.
"I believe he managed well, because I could have won that match," said Tsonga. "He was very solid, especially during the important moments of the match."
Tsonga got off to a great start against Nishikori, punishing him with his booming forehand, but lost focus inexplicably in the second set, falling 4-1 behind.
Although he managed to force a tiebreak, a string of unforced errors threw the match into a decider, which Nishikori won as his opponent double-faulted on match point.
Tsonga had only this week announced a new two-man coaching team that he hopes will push him closer to his career high ranking .
The defeat rules Tsonga out of the season-ending finals in London, and gives a helping hand to compatriot Richard Gasquet - ranked one place above him in nine - who had earlier kept alive his hopes with a 7-5 6-7(6) 6-3 win over Fernando Verdasco in the second round.
Provided neither Tommy Haas nor Nicolas Almagro wins the event, and Milos Raonic does not make the final, Gasquet will qualify for the event due to Andy Murray's injury. Roger Federer, ranked seventh, is also all-but through.
Gasquet must get past Japan's Nishikori next in his bid for qualification; Nishikori, meanwhile, moves to 16th in the ATP Race but cannot reach the Finals at the O2.
"I felt bad," said Gasquet afterwards. "I had two match points and I was close to winning the match.
"There was a tie-break after that, and I thought it was very tough to lose that second set. Physically, it was tough. It could have turned around in his favour. I was lucky.
Gasquet, who reached the semis at this year's US Open, has been nursing thigh pain as the end of a long season looms.
"It hurts sometimes, but it's not very serious. I played two hours and 45 minutes today, and I saw that I could play, although I was not at 100 percent.
"I had a good season. I'm very happy with what I did. I will not have a lot of pressure for this match. It's sort of a gift for me to be here."
The Frenchman did not exactly shine in front of his home crowd, looking far from his attacking self in a two-hour, 41-minute tussle and allowing Verdasco to put him on the back foot too often.
The Spaniard, who had won six of their last seven encounters, saved 14 of 18 break points but eventually Gasquet's superb single-handed backhand made the difference.
Gasquet wrapped it up on his fifth match point when Verdasco, an Australian Open semi-finalist in 2009, returned long.
Five players - Rafa Nadal, Novak Djokovic, David Ferrer, Juan Martin del Potro and Tomas Berdych - have already secured their places at the ATP World Tour finals.
Federer, who is seventh in the ATP Race, will qualify if he wins his first match at Bercy after a bye into the second round.
His compatriot Stanislas Wawrinka and Gasquet started the week in eighth and ninth respectively.
In the first round, Grigor Dimitrov moved on at Bercy with a hard-fought win over Michael Llodra.
Bulgaria’s Dimitrov, who won his first career title in Stockholm last month, lost a first-set tie-breaker but came through 6-7(5) 6-3 6-3 against the veteran Frenchman.
Llodra, who will retire at the end of next season, said he made too many errors on his first serve – not ideal for a traditional serve-volleyer.
"The difference was when I started missing my first serves," Llodra told the ATP website. "I really had difficulties serving really hard lately.
“He is extremely fit right now. He's in good shape and that made a difference in important points."
2-Novak Djokovic (Serbia) beat Pierre-Hugues Herbert (France) 7-6(3) 6-3
Kei Nishikori (Japan) beat 8-Jo-Wilfried Tsonga (France) 1-6 7-6(4) 7-6(7)
14-Jerzy Janowicz (Poland) beat Santiago Giraldo (Colombia) 7-6(3) 6-3
9-Richard Gasquet (France) beat Fernando Verdasco (Spain) 7-5 6-7(6) 6-3
Kevin Anderson (South Africa) beat Mikhail Youzhny (Russia) 4-6 7-6(0) 2-1 (Youzhny retired)
Marcel Granollers (Spain) beat Dmitry Tursunov (Russia) 6-4 6-4
Ivan Dodig (Croatia) beat Edouard Roger-Vasselin (France) 7-6(6) 6-4
Pablo Andujar (Spain) beat Vasek Pospisil (Canada) 6-4 2-6 6-4
Nicolas Mahut (France) beat Alexandr Dolgopolov (Ukraine) 7-6(6) 6-1
Grigor Dimitrov (Bulgaria) beat Michael Llodra (France) 6-7(5) 6-3 6-3
Michal Przysiezny (Poland) beat Jarkko Nieminen (Finland) 6-3 7-6(6)