"Even if sometimes it's tough for me to accept all these things that I am going through during all my career, sometimes I feel sad because I feel always in disadvantage compared with all my opponents in terms of preparation and in terms of practice and sometimes under competition", an emotional Nadal said.
The meeting between Nadal and Federer would have been their 39th in long rivalry and the first since 2017.
Federer was warming up on another court at the same time as Nadal and figured the match was on.
"I got on the golf cart back to the main building then Rafa texted me a message saying, 'It's not going to be possible, my knee's not well and I can't do it.' I went back to the house and relaxed".
"It is not about only today", Nadal said in an emotional press conference after announcing his decision. "What I'm gonna do is go home and try to smoothly transition to clay and be 100 percent for the first event in Monte Carlo". "And at the same time, two players with a good relationship after all the things that we went through in our careers, competing for the most important things", he said.
The Spanish superstar, who has battled knee tendinitis and other injuries throughout his career, made it through a 7-6 (7/2), 7-6 (7/2) win over Karen Khachanov in the quarter-finals on Friday.
"I am obviously excited to be in the finals, but not this way".
Thiem and Federer have split their four previous meetings, with only one going three sets.
Nadal choked up discussing his withdrawal last fall and he appeared near tears on Saturday.
It means Federer is into a third successive Indian Wells final and having been beaten by Juan Martin del Potro in a thriller last year, he will hope to claim his sixth title in the Californian desert, two years after his last which came after victory over Stan Wawrinka.