Novak Djokovic was the heavy favourite heading into the final after easing through the round robin stage and semis.
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But Zverev refused to be overawed by playing the world No 1 and produced one of his best performances of his young career.
The 21-year-old is the first player to beat both Djokovic and Roger Federer in the same ATP Finals.
And he’s also the first player to beat the top two seeds in the semis and final of the event since Andre Agassi in 1990.
When asked if his heavy workload in the last few months had caught up with him, Djokovic said: “Maybe. Yeah, maybe a little bit.
“Health-wise I haven’t been really perfect in the last three, four weeks. That took a lot out of me.
“But at the same time, I played finals of Bercy and here. I mean, I have to be happy with that result.
“Of course, finishing the year as No. 1, that was the goal coming into the indoor season. I managed to achieve that.
Novak Djokovic was below par against Alexander Zverev
“Overall it was a phenomenal season that I have to be definitely very proud of.”
Djokovic then expressed his happiness for Zverev, who won the biggest tournament of his career.
He said: “I’m really happy for him.
“I mean, obviously it’s not great to lose a tennis match, especially in the finals of a big tournament. Quite disappointed with my game.
Novak Djokovic holds his runners-up trophy after losing to Alexander Zverev
“But I’m happy that he won the big title because we have a really good and friendly relationship.
“We reside in the same place. We train a lot. We see each other a lot. He comes from a really nice family.
“As he said on the court, share a lot of on-and-off-the-court friendly and respectful moments.
“I mean, obviously you could see how much it means to him. Obviously, he deserved it.”
Novak Djokovic: Alexander Zverev broke down after beating Djokovic
Novak Djokovic was beaten by the young German in the ATP Tour Finals
And BBC pundit Tim Henman revealed how the German managed to overcome Djokovic.
“It was Zverev’s resilience and determination that finally wore Djokovic down today, which is very unusual,” he said.
Boris Becker was emotional when speaking on commentary as he watched his compatriot seal victory.
He said: “A German with a sense of humour who can talk and laugh at himself – a star has arrived.
“The way he’s carried himself, he understands the responsibility that comes with the title.”
Novak Djokovic embraces Alexander Zverev after the final
Zverev thanked Djokovic for letting him win the biggest title of his career.
“I really can’t describe it. It is the biggest title I have ever won,” he said on court afterwards.
“Firstly I want to congratulate Novak and we may never have seen the tennis he has played in the last few months before. He barely lost a match but thankfully he did to me.”
He continued: “We [Djokovic and Zverev] had so many talks, not only about tennis but all different types of subjects – I won’t mention what – but you are a sharing person and you have shared some titles with me. I appreciate you letting me win one today.
“Also huge congratulations to the whole Djokovic team. Finishing as world number one after having surgery this year, I don’t know if that has been done before. You are one of the best teams on tour so good luck for next year.”
Novak Djokovic lost the final to Alexander Zverev
Novak Djokovic vs Alexander Zverev match summary
The 21-year-old broke serve once in the opening set and three times in the second to pull off a shock victory in a packed 02 Arena – denying Serbian Djokovic a record-equalling sixth title at the ATP’s blue-riband event.
Djokovic was a firm favourite having looked unbeatable all week, not dropping a set or even a service game, but 24 hours after being booed following a semi-final win over Roger Federer, Zverev had the crowd drooling over an audacious display.
Zverev is the first German to win the title since Boris Becker in Frankfurt in 1995 and the youngest since Djokovic won at the same age in Shanghai in 2008.
Djokovic had beaten Zverev comfortably in the round-robin phase on Wednesday, but he looked edgy.
Novak Djokovic and Alexander Zverev after the final at the ATP Finals
At 4-4 in the opener a couple of poor Djokovic forehands gave Zverev the chance to serve for the set and he sealed it thanks to three consecutive aces.
An increasingly ragged Djokovic then dropped his opening two service games of the second set, either side of breaking Zverev for the first time.
With victory looming world number five, Zverev showed no sign of nerves and clinched the title when he sent a backhand winner past a stunned Djomovic.
He collapsed onto his back before Djokovic sportingly walked around to the other side to congratulate him.