The Russian, who failed to win a match on his debut last year, reeled off seven games in a row at one point and never looked like faltering in a 6-3 6-3 victory.
That guaranteed Medvedev will top the Tokyo 1970 group while Djokovic, who has his sights set on a record-equalling sixth title, faces a straight fight against Alexander Zverev for the second qualifying spot.
It was the second day in a row that the O2 witnessed the defeat of one of tennis' leading duo but, unlike Dominic Thiem's pulsating battle with Rafael Nadal, this was not particularly close.
Djokovic's second serve took a pounding at the hands of Medvedev, who arrived in London with confidence high after winning the Paris Masters earlier this month.
Both men had been relatively untroubled in their opening contests, Djokovic beating Diego Schwartzman and Medvedev seeing off Zverev, and straight away there were lung-busting rallies as each tried to grab the upper hand from the baseline.
Medvedev is an exceptional mover for his height of 6ft 6in and time and again his long levers allowed him to retrieve one more ball than Djokovic was expecting.
The world number one saved two break points in the third game but more chances arrived in the seventh game and this time Medvedev came out on top of another corner-to-corner rally to seize the advantage.
Both men sucked in air as they sat down at the change of ends but it was Medvedev who was suffocating Djokovic with the excellence of his play and he won his fourth successive game to clinch the set.
The drop shot was again proving more of a liability than a help to Djokovic while his serve was well below par, the top seed sending down his fourth double fault of the match on set point.
And there was no shift in momentum at the start of the second set, Djokovic looking bereft of ideas as Medvedev broke serve for a third successive time.
He finally stopped the run of games against him by holding for 3-1 but a comeback never looked on the cards and Medvedev comfortably wrapped up victory.
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