Federer meanwhile, will face Japan's Kei Nishikori.
Federer, who has not competed in Paris at either the French Open or indoor Masters since 2015, received a standing ovation after making a winning comeback in Bercy following his late decision to compete after his 99th triumph in Basel on Sunday.
Announcing his withdrawal at a hastily arranged press conference Nadal said: "My abdominal muscles haven't felt good for the past few days, especially on serve, doctors recommended that I didn't play". South African seventh seed Kevin Anderson, the champion in Vienna at the weekend, battled past Nikoloz Basilashvili of Georgia 6-3, 6-7 (3/7), 7-6 (7/3).
"Against Novak, it will be another big challenge".More news: Australian man jailed for persuading wife to kill herself
Djokovic extended his winning streak to 20 straight matches as he maintained the remarkable spell of form that helped him rise from No.22 in June to the top of the game again.
Raonic, from Thornhill, Ont., was coming off a tough 6-7 (4), 7-6 (5), 7-6 (5) first-round win over France's Jo-Wilfried Tsonga on Tuesday.
Serbia's legendary tennis player, World No. 2, Novak Djokovic, booked a place in the Paris Masters quarterfinals after Damir Dzumhur of Bosnia and Herzegovina retired, trailing 1-6, 1-2 after 52 minutes of play.
The Swiss looked to be out of sight when he moved 4-1 up in the opener - Fognini again hitting the net under pressure - but there was instant response and Federer's advantage soon threatened to be wiped out completely.
Djokovic, who will reclaim the No. 1 ranking next week regardless of where he finishes, faces Marin Cilic in the quarter-finals.More news: Bucks F Antetokounmpo cleared from concussion protocol
When asked about the London finals he added: "I am very sorry but I can not answer you".
The Wimbledon and US Open champion did not face a break point in the match and won 72% of first-serve points. Early in the season, the leadership kept the Rafael Nadal, then the Spaniard three times, exchanging positions with Roger Federer, who managed to become the oldest leader of the rating in the history of the ATP tour.
Isner's United States compatriot Jack Sock, who's the defending Paris Masters champion, also advanced with a 6-0 6-4 triumph over Malek Jaziri.
Alexander Zverev eased into the quarter-finals with a 6-4 6-2 win over Diego Schwartzman, and will now play Russia's Karen Khachanov, who needed three sets to see off John Isner 6-4 6-7 (9) 7-6 (8).More news: Nasas planet-hunter telescope, Kepler, runs out of fuel