Federer was broken when serving for the first set and crushed in the second-set tie-break, suffering his first defeat to Blake in nine meetings and ending his bid for a first Olympic medal.
It was Federer's third defeat in six matches since losing his five-year Wimbledon crown.
He was beaten by Gilles Simon in Canada and then fell to Ivo Karlovic in Cincinnati.
The Swiss will be supplanted by French Open and Wimbledon champion Rafael Nadal on Monday after a record four-and-a-half years as number one.
Blake now faces either Paul-Henri Mathieu of France or Fernando Gonzalez, the Chilean 12th seed, for a place in the final.
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