The 35th-ranked Spaniard saved two match points in the second set and went on to overwhelm the exhausted fourth seed in the deciding third set.
Blake's semifinal against second seed Nikolay Davydenko was interrupted due to rain and he was forced to complete the match on Sunday morning, beating the Russian 6-7, 7-6, 6-2 by using a varied style to overcome his opponent's strong baseline game.
But that effort took its toll in the third set of the final, with Blake losing his composure and making several unforced errors in the decider.
"To come back here and win the trophy is very special as it's precisely here that I first played in the main draw," the seventh seed Montanes said.
"I feel confident for the Madrid and Roland Garros tournaments and I feel I can beat any player, even on clay courts," world number 16 Blake said despite the defeat in the title decider.
Jankovic, Robredo win
World number four Jelena Jankovic got her bid for a second clay title of the year off to a flying start, when she crushed Nuria Llagostera Vives 6-2, 6-1, in the Madrid Open first round on Sunday.
The Serbian fourth seed, who won the Andalucia Tennis Championships last month, broke the Spanish wild card seven times and next faces Slovakia's Daniela Hantuchova or Argentina’s Gisela Dulko.
In the first round of the men's main draw at the combined event, 16th seed Tommy Robredo was the highest-ranked player in action and had to come from a set down to beat Germany's Nicolas Kiefer 3-6, 6-2, 6-2.
Paes, Bhupathi in last 16
Leander Paes and Mahesh Bhupathi advanced to the prequarterfinals of the Madrid Open along with their respective partners after getting a bye in the first round.
Paes and Czech Lukas Dlouhy, seeded third, will take on the winners of the match between Frantisek Cermak and Michal Mertinak and Julian Knowle and Jurgen Melzer in the next round.
The fourth seeded pair of Bhupathi and Bahamian Mark Knowles will begin their campaign against either Pablo Andujar and Guillermo Garcia-Lopez or Stephen Huss and Ross Hutchins.
Agencies
Results (Madrid Open, prefix number denotes seeding):
Men (I round): Robin Soderling (Swe) bt Ivan Navarro (Spa) 6-4, 6-2; 12-David Ferrer (Spa) bt Guillermo Canas (Arg) 6-2, 6-2; Ivan Ljubicic (Cro) bt Teimuraz Gabashvili (Rus) 6-3, 6-2; Florent Serra (Fra) bt Rainer Schuettler 6-2, 6-4; Mardy Fish (US) bt Janko Tipsarevic (Ser) 7-6(3), 6-4; Oscar Hernandez (Spa) bt Martin Vassallo Arguello (Arg) 6-3, 6-3.
Women: Second round: Elena Vesnina (Rus) bt Virginie Razzano (Fra) 7-5, 6-3.
First round: Amelie Mauresmo (Fra) bt Ai Sugiyama (Jap) 6-2, 6-4; Varvara Lepchenko (US) bt Magdalena Rybarikova (Slo) 7-6(12), 5-7, 6-1; Peng Shuai (Chn) bt Anastasia Pavlyuchenkova (Rus) 6-1, 7-6(2); Roberta Vinci (Ita) bt Maria Jose Martinez Sanchez (Spa) 4-6, 6-2, 6-4.
