The Serb won 7-6 (8-6) 7-5 to add the season-ending title to his Australian Open victory and top ranking.
He needed two hours and 14 minutes to take two sets in a match of dramatic swings in momentum.
It is the second time Djokovic has won the ATP finale, following his triumph in Shanghai four years ago.
"I was just trying to hang in there," said Djokovic.
"It's not the first time that Roger started so well against me. I've experienced before his aggression, really trying to put his mark on the match."
He added: "Whenever I needed to come up with some really good shots - really focus myself and get every ball back in the court - I did that, so I cannot be more thrilled than now."
Federer was attempting to become the first man since
Ivan Lendl 25 years ago to win a hat-trick of season-ending championships, and
his seventh overall.
"Maybe there's a bit of regret because I had the lead twice before him," the 31-year-old admitted in defeat.
"At the end of the day that doesn't matter, you have to get over the finish line in the set and then obviously the match. He was better at that today.
"What he does well - even in defence he stays somewhat offensive. That, I think, is what separates him from the rest a little bit."
Federer has made London's O2 Arena a second home in winning there for the last two years and, as ever, the Swiss did not lack for support.
The atmosphere might not have been cranked up at the start as it was in Sunday's semi-final against Andy Murray, but the Federer fans were in full voice as their man reeled off the first nine points.
Djokovic appeared nervous, fluffing a routine volley and firing long as he slipped, and there were ironic cheers when he finally got on the board in game three.
The winners were flowing from Federer but it was a case of brilliance against resilience as Djokovic dug in and weathered the storm by extending the rallies whenever possible.
