Nadal's absence from the tournament boosting arch rival Roger Federer's dream of ending the season at the top spot in the ATP Rankings.
The 16-time Grand Slam champion confirmed the news about his withdrawal on Facebook.
"I sadly announce that I have to pull out of the Swiss Indoors Basel, after seeing my doctor in Spain just after landing from Shanghai," Nadal said in a statement.
"I am suffering from an over stressing of the knee and the problems where already present at the tournament in Shanghai which now forces me to take a time off on advice of my doctor."
"After two great weeks in China, with the title in Beijing and the final in Shanghai it is time for some rest," he added.
The 31-year-old earlier last week suffered a crushing 4-6, 3-6 defeat against Federer in the finals of the Shanghai Masters.
"I want to send a special message to the many tennis fans in Switzerland which have always showed great support and respect also on my matches with Roger. Hope to see you next year," wrote Nadal thanking his Swiss fans.
The Swiss Indoors Basel, which commences from October 21 till October 29, still boasts an impressive player field including Federer, Marin Cilic, Juan Martin del Potro, David Goffin, Nick Kyrgios and Roberto Bautista Agut. (ANI)