Nadal arrived at the Wimbledon warm-up event admitting he felt exhausted in the aftermath of his record-equalling sixth triumph at the French Open.
Despite his tiredness this was still a major blow for the Spaniard, who had reached seven successive finals before this defeat, and it leaves him short of game time on grass ahead of the defence of his Wimbledon title later this month.
"After losing the second set, mentally I lost my concentration. It has been a lot of matches in a row and after that break in the third set it was a mountain for me to come back," said Nadal.
"I am a little tired. I wasn't there like usual and certainly I think I need a little bit of break."
Tsonga added: "The first time I reached the world top 100 was here at Queen's and today I have beaten the world number one. It was close to my best tennis -- it has to be to beat Rafa."
The match wasn't even two games old when a light shower forced the players off court, but they returned within half an hour to slug it out in a setgruelling first set.
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Nadal had been below his best in a three-set win against Radek Stepanek in the previous round and Tsonga provided an even greater threat than the Czech veteran.
He refused to give an inch to Nadal as the first set went without a break of serve.
The tie-break was equally close, but Nadal raised his game at the key moment and, aided by a Tsonga double-fault that gave him set-point, the Spaniard buried a volley to take the set.
Tsonga came at Nadal just as strongly in the second set however and the Wimbledon champion found it harder to keep him at bay this time.
The Frenchman's brilliant diving winner put Nadal under pressure at 4-4 and he broke when Nadal dragged a forehand well wide before producing a strong service game to send the match to a final set.
Nadal looked a spent force now and Tsonga went for the kill. He broke twice in quick succession to establish a 3-0 lead and was never in danger of relinquishing his advantage.
Tsonga was a picture of joy as he danced on the court in celebration of only his second career win over Nadal, a triumph that sets up a semifinal against British wildcard James Ward.
Andy Roddick kept his bid for a record fifth Queen's title on course as the American set up a semifinal clash with Andy Murray after beating Spain's Fernando Verdasco 6-2, 6-2.
World number four Murray reached the semifinals after his last-eight opponent Marin Cilic was forced to pull out before the match due to an ankle injury.
Murray was joined in the semifinals by his compatriot Ward as the British number two enjoyed a superb double success.
Ward, ranked 216th, started the day by ending Sam Querrey's reign as Queen's champion as he won the final set of their rain-delayed third-round match to clinch a shock 3-6, 6-3, 6-4 victory.
The 24-year-old son of a London taxi driver had to return just hours later for his quarterfinal clash against France's Adrian Mannarino.
But Ward showed no signs of tiredness as he recovered from wasting seven match points in the second set to win 6-2, 6-7 (14/16), 6-4.
Ward, who was watched by British Prime Minister David Cameron, said: "This is a brilliant feeling. I played a poor game at the beginning of the third but I knew I'd get my chances.
"It's a shame I'm not playing Rafael Nadal, but it's not exactly a bonus draw playing Tsonga."
