Both players were heavily criticised for agreeing to the lucrative contest in light of Saudi Arabia's human rights record, with the exhibition announced less than a week after journalist Jamal Khashoggi was killed in the Saudi consulate in Istanbul.
Talking about the event at last week's Paris Masters, both men said they committed to it a year ago and needed more information before taking a final decision about whether to compete.
But Nadal's ankle surgery earlier this week, which he had to remove a floating body in the joint after an abdominal injury ruled him out of the ATP Finals, means a politically-sensitive decision has been taken out of their hands.
Speaking at a press conference ahead of the tournament at London's O2 Arena, Djokovic told reporters: "It's not happening."
Asked if that was because of Nadal's injury, Djokovic replied simply: "Yes."
Djokovic is looking to join Roger Federer as the most successful player in the history of the tournament by winning his sixth title and fifth at the O2.
Djokovic lifted the trophy for four years in a row between 2012 and 2015, while Federer is bidding for his first title since 2011.