Nadal advanced to the final without dropping a set in a 6-3, 6-4 win over Gilles Simon, while Djokovic rallied from a set down to beat Tomas Berdych 4-6, 6-3, 6-2 and reach his second final at Monte Carlo.
"He's the best ever in history of the sport on this surface. It's an ultimate challenge," Djokovic said. "I cannot have ups and downs. I cannot afford that against Rafa. But why not believe that I can win?"
Djokovic has beaten the Spaniard in seven consecutive finals, including the recent Australian Open, and handed Nadal his only two defeats on clay last year.
"I have everything to win. That's the only positive thing about losing seven times," Nadal said. "The next matches, you only have to win."
Nadal had not played for three weeks until the tournament after resting his troublesome left knee.
"Don't forget that few weeks ago, I didn't know if I will be here playing or not," he said. "The match will be a fantastic test for me, and I have to play aggressive."
With the Monte Carlo court among the slowest on the clay circuit, the conditions suit Nadal. However, he thinks that working his way back to full fitness, along with Djokovic's recent record against him, means the Serb is the favorite.
"Seriously, I (would) like to play this match a few weeks later," Nadal said. "When one player beats another one seven times in a row (on) clay, hard, and grass, is very easy to decide the favorite."
Overall, Nadal leads their head-to-heads 16-14 but has not won since a group-stage match at the 2010 ATP Finals in London. Nadal has not lost in Monte Carlo since 2003 - he was injured the following year - and has won 41 straight matches here.
"We are evenly matched," Djokovic said. "You always know that Rafa is going to come up with his best fight and his best tennis."
But the Serb, who lost to Nadal in the 2009 final, is playing under difficult circumstances.
Two days after the death of his grandfather, he pointed to the sky for several moments after his win against Berdych.
"Under the circumstances, I didn't know if I could reach the final this week," Djokovic said.
The 10-time Grand Slam champion Nadal is without a title since winning last year's French Open. He was also without a title in 2011 heading into Monte Carlo, then went on to win here and at Roland Garros.
Simon had Nadal under pressure at 3-3 in the first set. Nadal was down 15-40 in the seventh game and Simon was dominating the rally from the back of the court until one Nadal return took a bad bounce and the ball skidded under Simon's racket.
On the next point, Simon then hurried a volley at the net, patting it straight back to Nadal, who clipped a passing shot that forced Simon to chop a backhand volley into the net at full stretch.
"That was the most important (moment) because I know after that I play with new balls," Nadal said. "That is better for me because the bounces are higher and more favorable for me, and with the wind in my favor."
Simon missed all seven chances he had to break Nadal's serve.
Nadal clinched victory on his first match point when he held for love.
The wind was swirling less when Nadal played, but Djokovic and Berdych were caught up in the thick of it.
"The wind blew all the clay from the court. It was like a hard court today," Djokovic said.
Berdych felt he was impeded from playing his best tennis.
"Sometimes, you can play when it's windy. But actually this kind of wind was kind of like there was circles around," he said. "You never know from where it's going to come. For my game, it was just, you know, a bit of a killer because I like to play aggressive."
Djokovic closed out the match on his serve and clenched both fists before shouting, "Come on!"
Berdych had sent Andy Murray scampering to all parts of the court in Friday's quarterfinal, and Djokovic felt the full weight of the Berdych forehand in the first set as the Czech reeled off four consecutive games to fight back from 4-2 down.
Djokovic was driven to frustration, and lost his temper, but he still made Berdych save a break point to serve out the set. Djokovic improved to 9-1 against the Czech after their first meeting on clay.