* Defending champion beaten by Japanese
* Nadal cruises past Russian Youzhny
* Murray wins marathon against Simon (Adds Murray result)
By Iain Rogers
MADRID, May 9 (Reuters) - Roger Federer's hopes of claiming a second straight Madrid Open title were dashed when the world number two suffered a surprise 6-4 1-6 6-2 third-round defeat to Japanese young gun Kei Nishikori on Thursday.
Playing his first tournament since taking a seven-week break following his quarter-final exit at Indian Wells, Federer became the second high-profile casualty at the clay Masters event following Tuesday's shock second-round defeat for world number one Novak Djokovic to unseeded Bulgarian Grigor Dimitrov.
The Swiss maestro's reverse, the 23-year-old Nishikori's biggest win since he beat Serb Djokovic in the semi-finals in Basel in 2011, also deprived fans of a possible last-four clash between Federer and local hero Rafa Nadal.
Nadal made smooth progress earlier on Thursday when he thumped unseeded Russian Mikhail Youzhny 6-2 6-3 to claim a spot in the quarter-finals.
He was joined by third seed Andy Murray, who had to come from a set down to get past 16th-seeded Frenchman Gilles Simon 2-6 6-4 7-6 in a three-hour marathon which ended after one o'clock in the morning local time (2300 GMT).
Federer, a three-time champion in Madrid and chasing his first title of the year, seemed to struggle in the breezy conditions inside the Magic Box arena and his game was littered with uncharacteristic errors.
After losing the first set, he upped his game to level but lost his serve early in the decider and Nishikori broke for a third time in the match to seal victory.
The world number 16 had lost to Federer in their only other meeting, the 2011 Basel final, and told a news conference it was an "amazing" experience to beat the man who had been one of his childhood idols.
"Actually, you know, to beat him, that was one of my goals for my tennis career," he said.
"And it happens on clay, it's amazing. You know it's not really my favorite surface."
Nishikori will play another Spaniard, wild card Pablo Andujar, for a place in Saturday's semi-finals, while a chastened Federer heads back to the practice court ahead of next week's Rome Masters.
"Credit to Kei he got it done and was more solid in the wind," the 31-year-old said.
"He played better than I did, so the better guy won today, that's for sure.
"I'll sit together tonight or tomorrow with the team and discuss what the plan is for the next few days and weeks.
"So I'm excited for that, because clearly I have no choice but to hit the practice courts."
While his great rival suffered, Nadal had an easy workout against Youzhny.
The Spanish world number five fell in the third round last year but never looked under pressure and showed his recent seven-month injury layoff had not robbed him of any agility.
He thrilled the crowd when he sealed victory by chasing down a Youzhny drop shot and whipping a forehand across court before indulging in one of his trademark fist pumps.
A former world number one and the current French Open champion, clay king Nadal slipped down the rankings after he was sidelined by a knee injury but has won four titles since his return in February and is bidding for a third triumph in Madrid.
His next match will be against compatriot and fourth seed David Ferrer, who produced some thrilling tennis to see off German 13th seed Tommy Haas 7-5 4-6 6-4.
"We are just doing what we can every day," Nadal said in an interview with Spanish television broadcaster La Sexta when asked about his physical condition.
"We are in the quarter-finals and it makes me very happy to have another chance to play in Madrid in front of these magnificent fans," the 26-year-old Majorcan added.
"It's not the time to be talking more than necessary. I will try to enjoy every moment as much as possible."
Briton Murray, whose chances of reaching the final have been boosted by the elimination of Djokovic, had only lost once to Simon in 11 previous meetings, a defeat at the Rome Masters in 2007 in their first encounter.
However, he was pushed all the way in their latest battle and needed six match points before he finally finished off the relentless Frenchman.
The Scot will play Czech Tomas Berdych, the sixth seed, on Friday who edged South Africa's Kevin Anderson 7-6 7-5.
Dimitrov failed to follow up on his fine win over Djokovic when he surrendered a one-set lead and was beaten 3-6 6-4 6-1 by Stanislas Wawrinka.