Dimitrov had three set points in the third that would have given him a two sets to one lead, but world number one Nadal hit back to take the tiebreaker 9-7 before easing through the fourth to book his place in the last four.
"I got lucky," Nadal said in a courtside interview, referring to the third set, when Dimitrov had set point at 6-5 on the Nadal serve and then another two in the tiebreak.
A shanked return cost him the first one and he missed an easy forehand on the second before Nadal cut off the third with an angled volley.
The Spaniard, who missed last year's event through injury, then broke early in the fourth set to lead 2-0 and maintained his advantage to seal victory, leaving Dimitrov fighting back the tears.
"It was a great atmosphere, a great afternoon and I hope you enjoyed it, but I suffered a lot," Nadal told the crowd.
Dimitrov, seeded 22nd, broke Nadal in the second game of the match and raced to a 5-2 lead, holding on to win it 6-3 with some attractive shot-making.
Nadal hit back to win the second set and led by a break in the third before Dimitrov rallied, earning himself a set point chance at 6-5, only to see it slide away as the Spaniard prevailed in a tight tiebreaker.
Nadal, who could become only the second man in the open era to win all four grand slam titles at least twice, had treatment for blisters on his left hand and admitted he was in discomfort throughout.
"Especially with the serve," he said. "The rest of the things are more or less fine but I feel like on the serve I can (drop) the racket.
"It's fine, I am going to try to keep improving it tomorrow. The blister is much better but if I am not playing with that protection it is much worse."
The 22-year-old Dimitrov was appearing in his first grand slam quarter-final and Nadal said he believed the Bulgarian would be a threat at every tournament from now on.
"He has everything to become a great champion," he said. "There are a lot of similarities with Roger (Federer), his style. If he is able to keep playing this way, with normal progression, he will be very tough."
Dimitrov vowed to come back stronger after failing to capitalise on his chances.
"Of course I shed a few tears, but it should hurt," the 22-year-old told reporters.
"It should hurt, and it does hurt. I can take a lot of things (out of his performance) but at the moment I'm just a bit all over the place.
"I'm deeply disappointed. I'm not going to lie. But I have to take the positives and the negatives out of the match and just kind of move on."
In his first grand slam quarter-final, Dimitrov, who has been tipped for the top ever since he won junior Wimbledon in 2008, took the attack to the world number one and was rewarded with the first set.
His flowing one-handed backhand held up well to the onslaught from the Nadal forehand but when the Spaniard levelled and then led by a break in the third set, it looked as if his chance had gone.
But three double-faults let Dimitrov back in to level at 4-4 and the Bulgarian looked like grabbing the set.
But after shanking a return on his first set point at 6-5, Dimitrov pulled a forehand wide on the second one after a fine serve had given him the chance to close it out.
"It hurts," he said, again holding back tears. "I'm happy that I took the decision. Once you take decision, never look back. Same thing in life. You make mistakes, it's in the past.
"It's just a tough shot. It's a tough choice. I'm sure I could have done something different. But in a match, everything comes down to a split second, whether it's in or out."
Dimitrov said he was looking forward to getting back on court sooner rather than later.
"Coming to that first quarter-final for me was big, but I had expectations for myself, not to just go out there and play," he said. "That, to me, is the biggest disappointment, the negative part of it.
"But I want to get to that position again, quarters, semis, final, whatever it is, any big tournament. That's my goal. That's why I'm actually excited to get on court in the upcoming weeks."