It took five sets to separate the two players in Melbourne, with the match lasting almost six hours - a record for the tournament.
Addressing the crowd following his win, Djokovic admitted that Nadal deserved to claim the trophy just as much as he did.
"Rafa, you are one of the best players ever and one of the most respected guys on tour," said the world number one.
"We made history tonight and it is a shame that there couldn't be two winners."
Djokovic's success was his third in Australia.