Nadal was an overwhelming favorite, shooting for this 37th singles title on clay.
Zeballos won his first singles title on any surface and looked every bit the equal of the seven-time French Open champion.
It was only the fifth singles final Nadal has lost on clay to go with 36 victories. Zeballos matched Nadal shot-for-shot with no service breaks until the third set, dropping to his back on the red clay surface after winning.
Nadal had not dropped a set all week until this loss.
"This is the game of my life," Zeballos said. "Playing against the best player of all-time, or one of the best in the history of tennis.
It's a dream, unforgettable. I will never forget this moment." Nadal spoke briefly after the match, and then prepared to play the doubles final with partner Juan Monaco against the Italian pair of Paolo Lorenzi and Potito Starace.
"It has been one of the most beautiful weeks lately for me after being unable to experience something like this for long time," Nadal said.
"The fact I am here has been a triumph." Nadal had most of the support, with fans waving Spanish flags and some wearing t-shirts saying "Vamos Rafa" and "Viva Espana."
The Spaniard has been treated like a hometown boy after arriving in Chile to play his first tournament.
Nadal will continue his comeback this week in the Brazil Open in Sao Paulo, and later this month plays again on clay in Acapulo, Mexico all aimed at getting him ready for a run at this eighth French Open title.