Thiem rocks Nadal in ATP Finals
The world number three, who defeated reigning champion Stefanos Tsitsipas in his opening game, has won his first two matches in this year's tournament as he looks to go one better than last year's runner-up finish.
Thiem will be guaranteed a semi-final place if Tsitsipas beats Russian seventh seed Andrey Rublev in Tuesday's other tie.
The 27-year-old has already enjoyed a year to remember, reaching two Grand Slam finals and winning one of the four majors for the first time when he defeated Alexander Zverev in the US Open final in September.
"It was a great match. I was pretty lucky to get that first set after being 5-2 down in the tie-break," Thiem said.
"He is there 100 percent from the first point to the last and I knew I had to stay focused.
"I had the feeling that the match was a very high level. The atmosphere would've been unreal if fans were in the arena."
Nadal, who last month equalled Roger Federer's record of 20 Grand Slams by winning the French Open, has won 86 titles but just one of those has come on an indoor hard court.
The world number two has qualified for the ATP Finals for 16 years in a row, but his record at the eight-man elite event pales in comparison with Federer and Novak Djokovic after six injury withdrawals.
Although Nadal had vanquished Thiem in two French Open finals, the Austrian had no reason to fear him, having beaten the Spaniard on his favourite clay surface three times and defeated him at the Australian Open this year.
This was their first meeting indoors and a hard-fought first set went down to a tie-break without either player facing a break point.
Nadal raced into a 5-2 lead in the breaker, but hit back to level at 5-5 before his first double-fault gifted the Spaniard a set point.
Nadal responded with the first break of the match, unleashing a thunderous winner down the line at 3-3 in the second set.
Even then, Thiem wouldn't be subdued and, holding his nerve in a brutal baseline duel, he grabbed his own first break in the next game.