The 12-time Grand Slam champion has reached the final of every tournament he's entered since losing to Filippo Volandri in the third round of the Rome Masters on May 10.

"I come here a big favorite and I'm on a great run again, having played only finals since many months," Federer said. "I think my level of play is very high at the moment. Even when I'm not playing my best I'm still very good."

Nalbandian beat Federer for the Madrid Masters title on Oct. 21 and has won both times the two have met in a tournament final. Having won four of the last five, Federer has an 8-7 edge over the Argentine, a 6-4, 6-4 winner over 14th-seeded Carlos Moya.

"I prefer to play him in the second or third round," Federer said. "He shanks balls and doesn't serve that good. His whole entire game is not as sharp as later in the rounds."

Against Karlovic, whom he beat in the semifinals of the Swiss Indoors on Saturday, Federer saved five break points. Karlovic hit 16 aces and managed to break Federer at the end of the second set to force a decider.

"He has made an enormous amount of progress from the back of the court," Federer said.

Federer looked in control of the second set, even managing to lob the ball over the 6-foot-10 Karlovic from the back of the court with one typically flamboyant shot.

But after a flurry of aces from Karlovic, Federer trailed 0-40 in the 10th game. After saving two break points, he returned long on the third.

The final few games had gone so quickly that neither player was sure the set was even completed.

"I thought it was 5-3. I didn't think it was over," Federer said. "When I looked up on the scoreboard it was the set, so I asked the umpire if he could just double check ... but some games went really fast. Maybe we forget a couple of games here or there."

Federer has already qualified for the season-ending Tennis Masters Cup in Shanghai, along with Rafael Nadal, Novak Djokovic, Nikolay Davydenko, Andy Roddick and David Ferrer.

Only two of eight spots remain open, and James Blake of the United States and Richard Gasquet of France also are still in contention.

The sixth-seeded Blake was later to face Nicolas Mahut of France.

Meanwhile, Djokovic was ousted from the Paris Masters, losing to French veteran Fabrice Santoro 6-3, 6-2 in the second round.

The U.S. Open finalist, who had two wisdom teeth removed after the Madrid Masters earlier this month, said he was not fully fit because he was still taking medication.

"I wasn't moving well," the third-ranked Serb said. "Santoro took over the control. I was having all the unforced errors and making free points for him. Unfortunately I couldn't give my 100 percent — not even 30 percent."

Djokovic, who returned to training Monday, lost to Nalbandian in the Madrid semifinals on Oct. 20.

Nadal overcame an early to break to easily beat Filippo Volandri 6-3, 6-1 and reach the third round.

"I'm happy with my serve," the second-ranked Spaniard said. "I made some mistakes at the start, but after that I played very well."

Nadal will next play Stanislas Wawrinka of Switzerland, who beat Juan Ignacio Chela 6-3, 6-1.

"Paris is a very big tournament and I am going to try to play my best here," Nadal said. "If I play a good tournament here I am going to arrive (in) Shanghai with more confidence."

Andy Murray beat Jarkko Nieminen of Finland 7-6 (5), 6-3 to stay in contention for Shanghai and next faces Santoro.

Gasquet rallied from 4-1 down in the first set to beat Jo-Wilfried Tsonga 7-5, 7-6 (3).

Thirteenth-seeded Ivan Ljubicic of Croatia saw his slim Shanghai hopes end after a 6-4, 7-6 (4) loss to Marcos Baghdatis of Cyprus, who next plays Davydenko, the defending champion.