Djokovic, who extended his current winning streak to 16 matches, will face sixth-seeded Tomas Berdych as he bids for a second title at the clay-court Masters.
With Prince Albert of Monaco among the onlookers, both players produced some stunning tennis in the semifinal as Nadal showed glimpses of his old self, mixing aggression and superb defensive shots.
But the Spaniard, who has been struggling to get back to his best after a wrist injury and an appendectomy, was not consistent enough to deny Djokovic a shot at his fourth Masters title in a row.
Following his title at the Paris Masters last year, Djokovic posted back-to-back victories at Indian Wells and Miami and will try to become the first player to win the first three Masters of the season.
Nadal will rue his missed chances in the seventh game of the opening set, when he was unable to seize the momentum after a stunning forehand down the line that wrongfooted the Serb. Even Djokovic clapped his racket in appreciation.
After Nadal earned a break opportunity, another superb rally followed but this time Djokovic prevailed, smashing a winner following an exchange of lobs.
Nadal went through a bad patch in the next game as he missed an easy backhand to hand Djokovic two break points. He saved the first one but shanked a forehand into the net on the second.
The second set was a tight affair, with Nadal fighting hard to stay in the match. He saved two break points on his first service game but Djokovic's aggression was finally rewarded after a tense seventh game. Nadal cracked on his forehand to drop his serve and Djokovic broke again in the ninth game to seal his 20th win in 43 matches with Nadal.
It was their first meeting since the Spaniard won his last big title with a win over Djokovic in last year's French Open final.
Earlier, Berdych overwhelmed Gael Monfis 6-1, 6-4 to advance to his first final in Monte Carlo.
Berdych immediately took control from the baseline and Monfils struggled to cope with the fast pace imposed by the big-hitting Czech. Monfils won just 11 points in a lopsided first set before the Frenchman changed his strategy, using more sliced shots to break up his opponent's rhythm. The move paid off early in the second set when Monfils broke back to level at 1-1 as Berdych made two forehand errors.
Monfils failed to build on the momentum, though, dropping his next service game as his hopes of becoming the first French player in 15 years to make the final at the Country Club vanished.
"It's always difficult when I'm up against Tomas, I can't find the proper way to play him," said the 14th-seeded Monfils after his sixth loss in seven matches against the Czech. "Hopefully I'll find the solution one day."
Monfils, who was a wild-card entry this week after recovering from a hip injury sooner than expected, added that his poor percentage on his first serve was a decisive factor."But even when I served well, he was retuning hard and deep," Monfils said. "He reads my serve very well."
After hiring Andy Murray's former coach Dani Vallverdu, Berdych has been in excellent form this year, reaching the semifinals at the Australian Open and finishing runner-up in Doha and Rotterdam.
"The best thing for me is that I can see the results behind it, which is always very nice and always positive because it hasn't been a quite easy decision to make that (coaching) change in the end of the last year," Berdych said. "I decided I still want to try to push myself higher and give myself another chance, to try to compete with the best ones and move myself higher and better. I think we (are) going the right way."