The Swiss' defeat opened the way for Rafael Nadal to take over the world No 1 spot by winning the tournament.

Karlovic powered 22 aces and some more service winners to overcome Federer 7-6 (8-6), 4-6, 7-6 (7-5).

'This year has been hard. But, nevertheless, I still think it'll be a good year. I just hope I can show it now at the Olympics and the US Open,' said Federer, who will be playing his third Olympics.

'I'm looking forward to the next two tournaments. Those are really the ones that can make this season from a good one to a great one again.

'I hope I can manage to pull off something in the next couple of weeks.'

Federer has been ranked No1 since Feb 2, 2004 - a record 235 consecutive weeks.

He and Nadal have held the top two spots since July 25, 2005.

Before the tournament, Federer had 6,605 points and Nadal 6,305.

They will swop places if Nadal extends his run of five consecutive tournament titles.

Asked about the possibility of that happening, Federer replied: 'I don't care.'

Nadal stayed on course for the seismic shift by beating German Tommy Haas 6-4, 7-6 (7-0) on Thursday.

He reached the quarter-finals with his 31st consecutive win.

Three more wins and the top spot in the world rankings belongs to him.

The only way he will not displace Federer in the next three weeks is if he loses in the last eight in Cincinnati and Federer wins the Olympic gold and Nadal does not reach the third round or better in Beijing.

'I know I'm in good position,' the Spaniard said. 'In truth, I don't think about it too much.'

Since his epic five-set loss to Nadal at Wimbledon, Federer has lost in the second round in Toronto and failed to make the quarter-finals in Cincinnati, where he won the title last year.

'It's disappointing, losing without getting broken, but I'm not the first player it has happened to, especially to a guy like Ivo,' Federer said.

'He served really well, so it was always going to be a hard match.

'There's always danger in tough matches against Ivo. I knew that from the start.'

The 26-year-old Swiss was using the tournament as a tune-up for the Olympics and admitted it was unusually difficult to take positives from what happened.

'I don't know what to take out of this match,' he said. 'There's always going to be a nothing match, these type of matches. What are you going to do? I just tried to serve well.'

The only consolation?

'It wasn't an Olympics or a US Open, so I can live with that,' he said.

ASSOCIATED PRESS, REUTERS, XINHUA