Brimming with confidence in a season which has seen him go from No. 22 in the rankings in May to No. 1 when they are released on Monday, and in which he has added the Wimbledon and U.S. Open to his Grand Slam haul, Djokovic created pressure throughout.
The unseeded Khachanov broke Thiem to lead 5-4 and served out the first set.
Djokovic will round out his year in London at the season-ending Tour Finals, which run from November 11-18, as he attempts to win the competition for a sixth time to draw level with the record held by Federer.
Russia's Karen Khachanov celebrates his first Masters triumph following a memorable win over Novak Djokovic.
The composed Khachanov maintained his momentum, breaking to lead 2-1 when Djokovic put a backhand into the net and showing lightning sharp reactions to put away a volley at the net as he continued to put the favourite under pressure. "I came here to Paris with no expectations and figuring that I'd just play a match or two, thinking I'd probably lose because I was too exhausted after Basel".
"But overall I'm happy with my game".
A rasping serve down the tee sealed the set for the 22-year-old, with Djokovic looking flat and in need of inspiration.
He then made the most of a third break point in the third game of the second set with a running forehand victor, before holding his nerve to serve out the match. "I'm really pleased to overcome this kind of challenge".
"We had epic matches throughout our rivalry but this one definitely ranks as one of the best", Djokovic said. I'll have to play well when it matters most. So all the credit to him.
Thiem joined Djokovic and Federer in the Nitto ATP Finals field when Kei Nishikori lost on Friday. Federer is two wins shy of his 100th career title. "I can't foresee too much in advance but I don't think it will be my last match here".
"This is my best match of the year, that's for sure", Djokovic said, addressing the crowd in French. But already, an established player, top player. He built a 4-2 advantage later on with an ace, as Djokovic seemingly didn't recover from fatigue following his three-hour semifinal tussle against Roger Federer.