World number one Rafael Nadal lost his first match of the year 6-4, 7-5 to Richard Gasquet at the Kooyong Classic on Tuesday, but said he was happy after his troublesome knee held up "fine".

Nadal's knee injury hampered the end of his 2017 season and forced him to skip last week's Brisbane International, but he was able to give it a workout at the non-tour event in Melbourne.

Though he lost in straight sets, the Spaniard said he would keep working hard until the start of the Australian Open at Melbourne Park on Monday.

"I"m very happy to be back in Australia," he said. "I had a heavy year in 2017 and I started my preparation later than usual.

"But I've arrived in plenty of time. It's great to get the feeling once again of playing a match.

"This was a good test for me after some good training, that's the most important thing."

The 16-time Grand Slam winner was far from his best in the exhibition encounter against a player he has beaten 15-0 on the ATP Tour in a rivalry dating back to junior days.

Nadal, 31, heads the entry list for the Australian Open and said he will be ready to front up for the first round.

"The knee is fine," he said in answer to the inevitable question. "I'm here.

"If I was not feeling good I would not be here, so that's good news.

"I'll train hard over the next few days for the Australian Open, I will be ready."

- 'Best in history' -

Nadal is not playing any more matches at Kooyong, but he is also scheduled to turn out for a Tie Break Tens tournament at Melbourne Park on Wednesday evening.

Gasquet, who missed Kooyong last year through illness and injury, was happy to get even an informal win over the Spaniard.

"It's always a pleasure to play Rafa -- I hope to beat him one day on the ATP before retiring. He's a friend of mine and it's great to play him," he said.

"I'm happy with how I'm playing after a test against Rafa, who along with Federer is the best in history."

Gasquet took the opening set, relying on a single break for 5-4 before serving it out against an opponent still trying to shake off the rust of inactivity.

The Frenchman found himself in more of a battle in the second set despite going up a double break for 3-0.

The deficit barely bothered Nadal, who showed some of his classic form in closing the gap to 3-3.

Gasquet forced Nadal to save break points throughout as the pair stayed level-pegging.

But the Frenchman finally broke for 6-5 and claimed victory with a smash winner on his first match point a game later.

Separately, Spain's Pablo Carreno Busta defeated Belgian world number seven David Goffin 1-6, 7-6 (7/4), 6-3.

In the women's competition, Germany's Andrea Petkovic rallied to defeat Australian teenager Destanee Aiava 3-6, 6-3, 6-2 in windy conditions.