The Argentine 10th seed had won the first set on a tie-break 7-6(3), but after being broken by the Croatian sixth seed midway through the second set to put him 4-3 behind Nalbandian kicked out in frustration at an advertising hoarding.
Unfortunately, the hoarding was right at the feet of line judge Andre McDougall, who caught the full force of Nalbandian's kick on his legs and eventually limped off court for treatment with his left shin bleeding.
After prolonged discussions between a number of tournament and ATP officials, umpire Fergus Murphy handed a code violation for unsportsmanlike behaviour to the 2002 Wimbledon finalist and awarded Cilic his first title of 2012.
The relevant ATP code states: "Players shall not at any time physically abuse any official, opponent, spectator or other person within the precincts of the tournament site. For purposes of this rule, physical abuse is the unauthorized touching of an official, opponent, and spectator or other person."
As a result, Nalbandian not only lost his right to play for the trophy, but also his prize money (around £36,000) and his ATP ranking points for reaching the final.
In a post-match interview conducted on court amid mixed reactions of boos and cheers from the crowd directed at both Nalbandian and officials, Nalbandian said: "I'm very sorry to do that, but I was very frustrated on court and sometimes it's tough to control that.
"I agree that I made a mistake, but sometimes everybody makes mistakes, and I didn't feel it had to end like that."
The bizarre events brought the curtain down on a torrid week at Queen's, in which star players Andy Murray, Andy Roddick and Jo-Wilfried Tsonga were eliminated in the early rounds and extreme wind and rain had hampered the tournament all week.
"It is just one of those things," said tournament organiser Chris Kermode. "In sport these things happen.
"It was an unbelievable final, the sun was out and it was shaping up to be the best match of the week.
"David Nalbandian ran across and in frustration kicked the panel out from under the line judge. It splintered and cut the linesman's leg, leaving him quite seriously injured.
"Rules are rules. The ATP forced us to end the final. David is struggling to come to terms with it. He is very sorry for what he has done."
Nalbandian had gone a break up in the very first game, only for Cilic to break back in the sixth. In the tie-break Nalbandian got the mini-break off his tall Croatian opponent - who often struggled with his big serve despite serving up six aces in the first set - before winning the breaker 7-3.
Just as Nalbandian had begun the first set with a break, so Cilic did at the start of the second set. Nalbandian levelled the set at 3-3 thanks to a sublime lob and some staunch defensive play, but Cilic immediately responded with another break of his own in the very next game.
Nalbandian was showing his frustration throughout that game, and twice threw his racquet to the ground before the violent outburst which led to his disqualification.