The Briton had never beaten Nadal in six previous meetings on the surface but won 6-3 6-2 to stun the home crowd.
Defending champion Nadal was aiming for a record fifth win in Madrid but Murray outclassed his Spanish opponent to lift his first Masters title on clay.
The 27-year-old, who won his first clay-court title in Munich, has now secured two in under a week.
