It was Nadals second straight win against the 23-year-old Austrian, coming two weeks after the Barcelona Open final when the fifth-ranked Spaniard cruised to victory in straight sets.
He had landed a first win over Novak Djokovic for three years on Saturday and has now equalled Djokovic's record of 30 Masters Series titles.
After wining the Monte Carlo Masters, the Barcelona Open and now his fifth Madrid title, Nadal is 15-0 on clay and the overwhelming favourite to lift an unprecedented 10th Roland Garros title later in May.
The Spaniard and four-time victor in Madrid got off to a dream start in the 50th meeting between the two great rivals, winning every point in the first game to break Djokovic, with the home crowd wildly celebrating his first point - a potent return which the Serbian could only hit into the ground.
"It was a game where I had to play well".
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Djokovic said Nadal had deserved to win the match and said the Spaniard was the favourite to win the French Open, the second grand slam of the season, which begins later this month.
Victory also ensured Nadal closes the gap on Djokovic's lead in their head-to-head record to 26-24. "I'm on the right track", added Nadal.
"Well, Rafa was obviously a better player today". Should he lift the trophy in Madrid, he will overhaul his other greatest rival Roger Federer in the rankings table and return to the world's top four. I really enjoy these tournaments.
Nadal, who was out for much of a year ago because of a wrist injury, has won 30 of his last 32 sets going into the tournament in Rome this week.
"I'm just going to go along, and in the next three, four weeks maximum, I'll make my decisions around that, about the team", Djokovic said.
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Early signs weren't good for Thiem after a break between sets as he surrendered his serve at the first time of asking, and despite keeping his enemy stuck to his own baseline at times, the Spanish native spun the fixture in his favour. "I want to fight again in every match".
Djokovic hasn't reached a final since winning his first tournament of the year in Doha in January.
Just like Nadal, Thiem also has dropped just one set so far in the Madrid Open but the eight seed faces a completely different test against Nadal in the finals.
"I did try my best", Djokovic said. He also beat Thiem in the Barcelona title match. "It shows you you're working in the right way", said Nadal, who has thrived after struggling with his game for two years. "I will give everything tomorrow and hope I can play a good final".
Indeed, even with Djokovic opening serve, Nadal won the first four points for an immediate break, helped by a couple of uncharacteristic errors from the Serb.
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After watching Real Madrid playing in La Liga, Nadal trotted along to press where, as always, e had to bat away the speculation of the Ultimate Decimal.
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