Nadal also beat Murray on his way to the Wimbledon title
Andy Murray's bid to reach the Toronto Masters final ended in a battling 7-6 (7-2) 6-3 defeat by Rafael Nadal.
A high-quality first set went to a tie-break, which Nadal won easily as Murray's form suddenly faltered.
Wimbledon champion Nadal, who is closing in on the world number one spot, broke for the first time to take a 3-1 lead in the second set.
But Murray, who was troubled by a knee injury, fought back to 3-3 before a relentless Nadal eventually prevailed.
Nadal is chasing his seventh title of the year and Murray, the British number one, feels the Spaniard is still improving.
"He's definitely doing a lot of things better than he was in the past," Murray said.
"I think he's moving better on hard courts, and I think he's sort of changing the pace of the ball a little bit more and not playing so far behind the baseline like he did in the past.
"That's why I think he'll be number one in the world soon."
Nadal faces Nicolas Kiefer in Sunday's final after the German toiled to a 6-7 (4-7) 6-3 7-6 (7-5) win over France's Gilles Simon.
The world number two will be seeking his 29th straight win and his fifth consecutive title as he closes in on Roger Federer at the top of the rankings.
Nadal crushed Murray on his way to taking the Wimbledon title earlier this month - but Saturday's affair was evenly matched.
Murray's confidence was high after posting his first ever win over Novak Djokovic in the quarter-finals and he headed into the semi-final looking to end his 100% losing record against Nadal.
The 21-year-old continued with the aggressive approach that had served him so well against the Serb.
He got to deuce on Nadal's serve in game two, but that turned out to be the closest either player got to a break point in a superb first set.
Murray, though, played a poor tie-break, twice netting forehands to hand Nadal set point before double-faulting to gift him the set.
I played very well against Andy today because, in my opinion, he played one of his best matches against me
The reason for his sudden dip in form became evident at the changeover when he had strapping applied to his right knee.
He emerged with renewed determination, earning the first break points of the match.
Nadal saved both, the first with an outrageous drop shot, and Murray's challenge appeared to be over when he fell 3-1 behind.
However, Murray hit back in the next game as Nadal, facing two break points, was rattled by a time violation and threw in a double-fault.
The Spaniard continued to make some uncharacteristic errors but he stepped up a gear to snatch what turned out to be the crucial break at 4-3.
A spirited Murray saved two match points but missed a close-range volley to gift Nadal a third, and the British number one netted to fall to his fifth straight defeat at the hands of Nadal, who was quick to praise his opponent.
"I played very well against Andy today because, in my opinion, he played one of his best matches against me," Nadal said afterwards.