Federer earned revenge after two spring losses to Guillermo Canas, crushing the 13th-seeded Argentine 6-0, 6-3.
Second seed Nadal, the home hero in Madrid, overcame confident Scot Andy Murray 7-6 (7-5), 6-4.
Nadal was playing for the first time since a US Open loss in the fourth round, the result of tendinitis in both knees.
The 2005 champion took the first set in more than an hour, then survived a second set littered with five breaks to finish the win with a shot to the corner past Murray.
"It was a great match for me," he said. "I played well when I had to.
"The first set was very important, the second set very tough, it was very competitive. It was draining physically. I'm happy to have survived."
Murray was still pleased after putting together three solid
matches this week. "I played pretty well. It was a long match with a lot of tough points.
"It could have gone either way. I'm disappointed to lose but it was a good match."
World number one Federer claimed the first seven games before the stunned Canas could finally trouble the scorekeeper.
Federer was out for blood after losing twice in as many weeks to the on-fire Canas at March Masters events in the US at Indian Wells and Miami.
Those two setbacks were among only six suffered so far in 2007 by the Swiss holder of a dozen Grand Slam titles.
"I always felt in control," Federer said. "It was a good feeling and it's nice to beat him. There was satisfaction in this match.
"To beat him after two tough losses is nice. I played aggressive and took my chances."
Federer put the quick win away in 53 minutes after sweeping the first set and breaking for 4-2 to insure the second.
It was his 56th victory of the season as he bids to repeat as Madrid champion.
"I think the court was slower at Indian Wells and Miami and that would have helped his game," said Federer. "Plus I didn't know his game so well in spring (with Canas away for 18 months on a drugs ban).
"At Indian Wells, I had a blister on my toe and in
Miami I failed to take my chances and lost it in the third-set tiebreak.
"I had to defend points at those two events, so it was tough to lose, it was big news.
"I didn't feel that I played badly, that's why I was able to turn around the season."
Federer is building for the season-ending Masters Cup in Shanghai, where he qualified months ago for the eight man filed.
The race for the last four places after Federer, Spain's Rafael Nadal, Novak Djokovic and Russian Nikolay Davydenko is heating up this week.
All will be decided over the next two weeks which end regular season ATP play.
Djokovic won his seventh match in a row as he followed up on last week' Vienna title, defeating 2003 champion Juan Carlos Ferrero 6-3, 2-6, 6-4.
The 20-year-old Serb, seeded third, will face Croatian Mario Ancic, who eliminated Paul-Henri Mathieu of France 6-4, 6-3.
Djokovic has been on a tear this season, lifting five titles including Masters events in Miami and beating Roger Federer in the final to win Montreal.
"I want to finish well here, in Paris and in Shanghai. I've had a long season and I'm very exhausted physically and mentally," said the Serb.
"It's been long year, but I still believe that I can do well here."
Spain's Ferrero saved match points before taking the loss in front of his home public. Djokovic had to overcome 40 unforced errors in a win lasting 2 hours, 11 minutes.
Chilean fifth seed Fernando Gonzalez moved closer to ticket to China after a 6-4, 6-2 win over Argentine Juan Monaco.
Gonzalez lost the Madrid final a year ago to Federer and was beaten in January's Australian Open final by the Swiss.
German Nicolas Kiefer will move back inside the Top 100 after ending the win streak of Ivo Karlovic, last week's Stockholm champion, 7-6 (7-5), 7-6 (7-3).
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