The Spaniard had been hoping to celebrate his return to the top of the world rankings this week by setting up a final showdown for the second time in as many weeks with chief rival Novak Djokovic.
But Nadal, one of the fastest athletes on the tour, found himself outpaced 6-2 6-4 after a breathtaking semi-final display of power and touch by the 2009 US Open champion.
Serb Djokovic continued his love affair with the hard courts of China as he swotted aside the challenge of Jo-Wilfried Tsonga 6-2 7-5.
The defending champion stretched his unbeaten run in China to 19 matches by overcoming Frenchman Tsonga.
Del Potro's 1.98-metre frame usually prevents him from threatening Nadal's unshakeable ability to run the ball down at every corner of the court and the Spaniard's 8-3 head-to-head record before the semi-final bore testament to that.
On Saturday though Del Potro barely allowed Nadal, winner of 10 titles this year, a chance as he raced into a 4-0 lead in the first set before bagging it with a scorching ace.
Nadal thought he had broken for the first time to level at 2-2 in the second but Hawkeye disagreed and from then on the world's best player was chasing shadows as Del Potro produced one of the best performances of his career.
The Spaniard fired a service return long on match point to leave a jubilant Del Potro leaping high into the air in celebration.
The result condemned French and US Open champion Nadal to his earliest defeat since a shock first-round exit from Wimbledon in June, the only other time this year he failed to reach the final of an event he had featured in.
Del Potro's first win over Nadal since 2009 also handed him a place in the season-ending World Tour Finals.
The Argentine became the fifth player to qualify for next month's elite eight-man tournament in London but four spots are still up for grabs as Wimbledon champion Andy Murray has ruled himself out following back surgery.
Nadal, Djokovic and David Ferrer are the other confirmed participants.
Djokovic lost the world number one ranking to Nadal last week despite beating the Spaniard in the final of the China Open to claim his fourth Beijing title in five years.
The Serb could add another Chinese title to his name after another slick display of returning in Shanghai heaped too much pressure on Tsonga who unravelled with 35 unforced errors.
The world number two and Australian Open champion was quick out of the blocks, racing into a 3-0 lead after breaking Tsonga to love in his opening service game.
The Frenchman looked like dropping another service game but some heavy hitting helped him get on the board before a sumptuous backhand crosscourt resulted in him breaking Djokovic in the next.
That was as good as it got for Tsonga, who is in a close race with Roger Federer, Stanislas Wawrinka, Richard Gasquet and Milos Raonic to grab one of the last remaining places at the ATP Tour Finals.
Djokovic claimed the next three games to wrap up the set as Tsonga's first serve percentage fell to 46, coupled with 14 unforced errors in comparison to just four by the Serb.
A change of shirt and a renewed focus helped Tsonga stay on terms at the start of the second set before another misplaced volley handed Djokovic a break and a 4-2 lead.
The Frenchman broke back immediately as Djokovic returned to his chair to scream at the umpire after a couple of late calls by a line judge.
The Serb regained his composure and the set looked to be heading for a tiebreak with Tsonga serving at 5-6 before Djokovic raised his game once more.
Tsonga saved one match point with a booming forehand before wasting the chance to force a tiebreak and Djokovic made him pay as he sealed victory at the second attempt with a powerful winner down the line.