Nadal said he needed an operation on his right ankle and is also yet to recover from the abdominal problem that kept him out of the Paris Masters last week.
It means Novak Djokovic is guaranteed to end the year top of the world rankings while John Isner, the world number 10, comes into the field for the ATP Finals on Sunday.
“I am writing to you to signal the end of the season,” Nadal said. “It has been a complicated year, very good in terms of tennis when I was able to play and very bad in terms of injuries.”
The 32-year-old won a record-extending 11th French Open title in June and reached the semi-finals both at Wimbledon and the US Open.
He was forced to retire mid-way through his US Open semi-final with Juan Martin Del Potro in September due to pain in his right knee and has not been able to play a competitive match since.
“I have done everything possible to reach the end of the season in good condition, both in Paris and London, and I really wanted to play,” Nadal added.
On his ankle problem, he said: “It is true that we knew about it for a long time and from time to time it bothered me.
“Since the problem in my abdominal muscle also prevents me from playing in London, we have decided to take advantage of the moment … and avoid future problems.
“In this way I hope to be in full condition for the next season.”
Djokovic finished runner-up at the Paris Masters after losing to Karan Khachanov on Sunday but still returned to number one in the rankings for the first time since 2016.
Without Nadal, the Serb will be the clear favourite at the ATP Finals, for which the draw will be made later on Monday.