The Austrian will be joined in the knockout stages by the winner of Djokovic’s match with Federer, while the loser will follow Matteo Berretini in failing to qualify from the group.
Thursday’s mouth-watering clash will be the first time Djokovic has met Federer since toppling the 38-year-old in their epic Wimbledon final back in July.
World No 5 Thiem edged their last meeting at the French Open in a five-set semi-final thriller, but it was Djokovic who led their head to head 6-3 going into their 10th showdown at the O2 Arena.
Djokovic struck the first blow when converting the first break of the match in the fourth game, but Thiem hit back immediately to bring it back on serve.
Thiem then saved three break points to level up at 3-3 before it went to a tie-breaker.
Djokovic edged it 7-5, but then lost his opening service game of the second set to hand Thiem a way back into the match.
Thiem did so without offering Djokovic a break-back opportunity, and by taking it to a decider, Berrettini – who has lost his opening two group matches – saw his slim hopes of reaching the last four ended.
The third set saw Thiem break straight away before saving three break points a game later as the intensity ramped up another notch.
Djokovic eventually broke back at 3-3, but was broken to love in the 11th game to leave Thiem on the brink of victory.
However, Djokovic responded in champion style, breaking back to force a final-set tie-breaker.
Djokovic moved 3-0 up in the breaker, only for Thiem to respond by winning five of the next six points.
And despite failing to convert his first match point on serve, Thiem made no mistake with the second to win a classic ATP FInals encounter.