Nadal has not lifted silverware since his French Open triumph in 2022 after a spate of injury problems, which meant he missed the majority of 2023.
The 22-time grand slam champion has been patient with his latest comeback but looked on course to triumph in Bastad after marathon three-set wins over Mariano Navone and Duje Ajdukovic fired him into the final.
But the match proved a bridge too far for the former world No.1 on Sunday, with Borges able to claim victory 6-3 6-2.
Breaks were exchanged early on between Nadal and Borges, who was competing in his first ever ATP Tour final.
After Borges came through a lengthy first service game to hold, he was able to break Nadal and it sparked a period of five consecutive breaks.
Eventually the Portuguese player halted the run to move 5-2 up and took the opener before Nadal was forced to dig deep at the start of the second set.
Nadal had to save a break point during a 14-minute opening game, but Borges seized his moment to move 3-2 ahead and clinched victory on his first match point with an ace to deny his 38-year-old opponent a long-awaited title after an-hour-and-28-minute battle.
Italy's Matteo Berrettini poses with the trophy after winning the Swiss Open in Gstaad. (AP PHOTO)
It has still been a productive week for Nadal, who won four matches in a row for the first time since 2022 and had his physical condition tested ahead of representing Spain at the impending Olympic Games, which take place at Roland Garros later this month.
Meanwhile, Italy's Matteo Berrettini claimed his second ATP Tour title of the season with a 6-3 6-1 win over Quentin Halys in the Swiss Open final.
Berrettini got the better of Stefanos Tsitsipas in a hard-fought last-four tie but wrapped up victory over France's Halys inside an hour in Gstaad.
After the final initially stayed on serve, Berrettini broke to move 4-3 up in the first set and won nine of the next 10 games to add the Swiss Open crown to his Grand Prix Hassan II title in April.
Germany's Alexander Zverev failed to retain his Hamburg Open title and suffered a blow before the Paris Olympics after Frenchman Arthur Fils beat him 6-3 3-6 7-6 (7-1) in Sunday's final.
The top seed had looked doubtful for the clay tournament after injuring his knee on the Wimbledon grass but managed to get fit and shine during the week, only to come up short in the deciding tie-break.
Fifth seed Fils, 20, took only his second career title after three hours and 33 minutes, sealing victory on his first match point.
With the Paris Games starting on Friday, Zverev, the reigning gold Olympic medallist, had pushed to play in his home Hamburg tournament in order to better prepare for the Roland Garros clay following the grass season.
But his record in finals again took a knock as his poise deserted him in the tie-break.
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