The top-ranked Swiss star lost his fifth straight match to Nadal on clay Sunday at the Monte Carlo Masters, 6-4, 6-4, and the second-ranked Spaniard extended his winning streak on the surface to 67 matches.
Nadal won the title at Monte Carlo for the third straight year. The two-time defending French Open champion is 14-0 in clay- court finals, and 4-0 against Federer.
"I lost four times against Rafa," Federer said. "I'd rather have that than lose against four different guys."
But despite his latest setback, the 10-time Grand Slam champion believes he's still on the right track to win the only major that eludes him.
Federer has four Wimbledon titles and three at both the U.S. and Australian opens, but still needs the French Open to complete the sweep.
"I feel this match gave me some information," he said. "I'm absolutely in the mix with him on clay. I feel like I'm in good shape for the rest of clay-court season, and it's going to come down to the French Open to see who wins."
Nadal beat Federer on clay last year in the finals of the Monte Carlo Masters, the Rome Masters and the French Open. He also beat Federer in the 2005 Monte Carlo semifinals.
Only at the Rome Masters did Nadal have to save a match point against Federer on clay.
"Today's match was very close. For sure, it's a surprise to win in two sets against the No. 1," Nadal said. "I was confident because I was playing my best tennis this week."
Nadal is the first player to win three straight Monte Carlo titles since Ilie Nastase (1971-73), and only the fourth in the Open era to have won it three times. Bjorn Borg and Thomas Muster also were three-time winners.
Federer, who won his previous two meetings with Nadal on other surfaces, missed two chances to break Nadal in the eighth game of the first set. Nadal saved the first with a strong serve, and the second when Federer's forehand went wide.
"I should have used my chances when I had them early on," Federer said. "Unfortunately, it turned around with a few mistakes."
It was Federer's third loss of the season. The other two came against Guillermo Canas last month at Indian Wells and Key Biscayne.
On Sunday, Federer made 38 unforced errors - half on his forehand - and Nadal won on his second match point when Federer sent a backhand long.
"I will try again to beat him in Rome, Hamburg and here in Monte Carlo next year," Federer said. Federer could not explain why his forehand - normally his most potent weapon - was well below its usual standard. "It rarely happens to me," Federer said. "It's the best shot of my game."
After failing to convert those two early break points against Nadal, Federer trailed 40-0 in the ninth game. He saved one break point, but then a long forehand gave Nadal a 5-4 lead, and he served out the set.
Nadal broke Federer again in the third game of the second set, when Federer's defensive volley was too short and the Spaniard sprinted forward to pass him down the line.
"Let's not forget he's an excellent player on clay," Federer said. "He's born on this surface. It's his No. 1 surface, and still I come so close ... four finals in a row on clay. I feel like I'm in good shape."