The 16-time Grand Slam victor told his Facebook followers he was skipping the October 21-29 tournament due to a knee injury.
Rafael Nadal has pulled out of the Swiss Indoors tournament in Basel to rest his right knee.
With the ATP Finals coming up next month, Nadal said on his Facebook page he had made the decision to pull out of next week's Basel tournament after getting medical advice.
Nadal, 31, leads Federer by 1,960 points in the rankings but the 36-year-old Swiss can gain 500 points if he wins at Basel with another 1,000 up for grabs at the Paris Masters.
Nadal shared details regarding his "over stressing of the knee" with his followers on social media.
"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", Nadal said. Federer will be seeking his eighth Swiss Indoors title.
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The tournament organisers confirmed that Federer would be slotted into the No. 1 seed.
The world No. 3 has not played a competitive match since a Wimbledon quarter-final defeat to Sam Querrey - withdrawing from the US Open at the last minute - and he has enjoyed a four-week break from general on-court action. The problems were already present at the tournament in Shanghai...
For now, Nadal and Federer are slated to play all three events, with Basel beginning next week.
Rafael Nadal is trying to finish the year as the World No. 1 for the fourth time in his career - after 2008, 2010 and 2013.
Federer beat the Spaniard at the Shanghai Masters on Sunday to close the gap at the top of the ATP rankings.