The second seed, who hasn't won the tournament in 11 attempts, looked out of sorts as he went down 4-6, 6-2, 3-6 to Verdasco in two hours and sixteen minutes.
The match statistics make for unpleasant reading for Nadal, with the 28-year-old committing a massive 40 unforced errors while producing just 18 winners.
A double fault from Nadal in the eighth game of the opening set handed Verdasco the first break. Nadal broke back immediately, but Verdsaco would once again find his way through the world number three's serve to take the set.
Nadal looked to be finding his feet in the second set, breaking Verdasco twice to take the set in just 45 minutes and send the clash into a decider.
However, Verdasco would be seize the key break in the third set and held on to take the match.
In the fourth round Verdasco will face the winner of the match between Guillermo Garcia-Lopez and Juan Monaco.