Djokovic came through 6-4 6-1 1-6 6-3 to end Nadal's reign as Wimbledon champion, before overtaking the Spaniard as world number one on Monday.
It was his 50th win in 51 matches and his fifth win over Nadal this year.
He becomes the first Serbian man to win Wimbledon, his third Grand Slam title after two Australian Open victories.
Djokovic had done enough before Sunday's final to guarantee himself the top ranking on Monday no matter what the result.
He came into the match having beaten the Spaniard in four finals already this year, but Nadal - on a 20-match winning streak at the All England Club - was still favoured by many to claim a third Wimbledon title as he had won all five Grand Slam meetings with Djokovic.
That record felt like anicent history as the Djokovic of 2011 overcame a slightly edgy start to take a stranglehold on the match.
In a desperately tight opening set, the pace and accuracy of the Serbian's groundstrokes began to draw errors from the usually faultless Nadal and earned him the first break point of the day at 5-4.
A Nadal forehand into the net gave Djokovic the set and the Spaniard appeared rattled, firing a smash over the baseline in a rare moment of promise at 30-30 at the start of the third.
Djokovic, brimming with energy and confidence, needed little encouragement and came haring in to chase down a drop shot in the next game, angling away the backhand to break before turning to his supporters to celebrate.
What followed was a breathtaking set that flew by as the Serbian fired 13 winners in what must rank among the best passages of play seen on Centre Court.
Nadal was in desperate trouble and needed a lifeline, which was handed to him when Djokovic played backhand into the net in the third to slip behind.
The champion grabbed the initiative, powering through a 6-1 set of his own and threatening a real comeback with a thumping forehand that made it 30-40 at the start of the fourth.
It was Djokovic who now had to change the momentum of the match and he saw off the danger with a forehand that Nadal just failed to return down the line.
The Nadal storm had passed for now and Djokovic sensed it, stealing into the net to play a beautiful drop volley and then forcing an error with some superb, deep groundstrokes to move 2-0 clear.
Victory was within sight for the Serbian but the match was quickly back in the balance in the cruellest of manners, when a Nadal return on break point clipped the net and rolled over.
The contest remained on a knife-edge but Nadal was always flirting with danger having dropped two sets, and a poor game at 4-3 down saw him broken to 15 and gave Djokovic the chance to serve for the title he had described beforehand as "a dream".
A very nervous forehand was hardly the way Djokovic would have chosen to start but two Nadal errors helped him out, and a brave serve volley at 30-30 brought up championship point.
Djokovic moved forward behind a heavy forehand and fell backwards onto the Centre Court turf in celebration as Nadal's desperate backhand flew long to give him the title.