The 31-year-old Serb, who will be officially anointed world number one on Monday, lost to the unseeded Russian in straight sets.
Khachanov, touted as one of the big prospects on the ATP tour, won 7-5 6-4 in one hour and 37 minutes.
“I think we should just talk about how well Karen played," said Djokovic. "He has played well all week. All the credit to him. He deserves the win. He’s a young player. He’s up and coming but already established as a top player."
Djokovic added: "He showed great quality in the final and he showed a lot of why we’re going to see a lot of him in the future.”
Khachanov came into the tournament having won only three of his 19 encounters with players in the top 10.
But in Paris he has cut a swathe through the alpha males of the tour. In the last 16, he saved two match points during his victory over the world number nine John Isner.
In the quarter-final, Khachanov pulverised the world number five Alex Zverev 6-1 6-2 and in the semi-final he dismissed the world number eight Dominic Thiem 6-4 6-1.
His triumph over Djokovic brought him his first title at a Masters event – considered just below the Grand Slam tournaments in terms of prestige.
“He’s playing big from the back of the court,” added Djokovic. “Flat backhands and forehands, they can really hurt you. They’re big weapons and as for his serve .. it is strong and precise. His overall game has been great all week.”
Djokovic, seeking his 33rd Masters crown, took the early initiative. After carving out a break point on Khachanov’s opening service game, he ultimately failed to convert it allowing him to level at 1-1.
Djokovic eventually broke to lead 3-1. But the Russian came straight back and they were all square at 3-3.
“I made a couple of unforced errors and just played a bad game,” Djokovic reflected. “Unfortunately I just didn’t have that little extra activation on the shots that I needed and which I’d had all week. That was what was lacking.”
In the second set, Khachanov broke to lead 2-1 and confirmed the break to take command of the match.
The question was would he maintain his composure in front of 14,000 spectators and one of the legends of the game.
Djokovic kept the pressure on by holding his serve. Khachanov held his nerve and served out to 15 to claim the biggest title of his career.
While Khachanov heads into the off season, Djokovic will venture to the eight man season ending championships in London as the top seed and in chipper form.
“Look, I am number one in the world," said Djokovic of his week in Paris. "I've won 20 odd matches in a row and have had the most amazing last five months of the year.
"I’ll go to London with a lot of confidence and feeling good about my game."