Nadal, who was visibly in pain and hobbling between points by the end of the match, fell 7-5 (5), 6-7 (4), 6-4. Afterward, he said he would take the time to prepare for 2018.
"My season is finished," Nadal said in a postmatch news conference. "I had the commitment with the event, with the city, with myself. I tried hard. I did the thing that I had to do, to try to be ready to play."
As of Friday at media day, Nadal, 31, wasn't sure whether he would be in good enough shape to give it a go, but he did. A couple of weeks ago, he pulled out of the Paris Masters midway because of his knee issue. Still, after eight appearances in the year-end championships, Nadal leaves without a title.
"It's not a [difficult] decision at all -- is about the pain," Nadal said. "I cannot hold with enough power to keep playing. I tried, but seriously, [it] was [a] miracle to be very close in the score during the match. It really doesn't make sense."
Nadal, like another Big Four member, Andy Murray, now has to work hard but carefully on his rehabilitation if he is going to be fully fit in time for the first major of 2018, the Australian Open in January.
Nadal admitted that his relationship with the season-ending tournament and aspirations to win it might have influenced his decision to play.
"[It] was the last event of the season," Nadal said. "Another thing will be if that was in the middle of the season or was another kind of event," Nadal said. "It's an event I missed too many times in my career. But that's how it works, my career. I can't complain.
"I am probably the top player that had more injuries and more troubles in the careers of everyone, no? Is always about this challenge. But I am used to this and I know what I have to do. I think I am ready to do it."
Surely nobody would doubt Nadal's fighting qualities after the way he bounced back from previous injuries and climbed from world No. 9 at the start of this year to end 2017 atop the rankings.
Goffin put pressure on the world No. 1, though he converted just five of his 13 break points and served multiple double faults at key moments. The fact that he let four match points slide -- in two different games -- before he finally converted told its own story.
The match lasted what must have been a painful 2 hours, 37 minutes for Nadal, and probably for at least the last set, he knew it was one contest too many this year.
"Even winning, even losing, I [was] going to pull out because I was not enjoying on court at all," he said. "Was not fun to play like this. I really believed that I don't deserve after this great season to spend two more days on court with these terrible feelings.
"I am, of course, disappointed. But I am not going to cry. I had a great season. I really appreciate all the things that happened to me during the whole season."
Dimitrov produced some great net play and showed impressive reserves of resilience as the out-of-form Thiem began to find his groove after the first set.
Dimitrov, the first from his country to make these finals, was emotional afterward.
"It was one of those new experiences I'm going to remember for the rest of my life," he said. "This is where I always wanted to be at.
"I was pretty nervous for my first match here. You come in and feel the weight on your shoulders, in a positive way. It isn't easy to come out here and play this tournament for the first time."
World No.10 Pablo Carreno Busta will take Nadal's place and take on Thiem on Wednesday.