Federer was taken to three sets by Karlovic

The world number one, who had already been made to work by Karlovic for a 7-6 7-6 semi-final win in Basel on Saturday, had further problems again.

But the Swiss took an early break in the decisive set and Karlovic missed a drop shot on the first match point.

Earlier, world number two Rafael Nadal beat Filippo Volandri 6-3 6-1.

Nadal produced an uneven display, and breaks were swapped early on but the Spaniard dominated after that with Volandri determined to battle from the baseline.

Nadal, in the opposite half of the draw from Britain's Andy Murray, broke five times in sealing a 6-3 6-1 victory.

Murray's possible fourth-round rival Richard Gasquet also won through, beating Jo Wilfied Tsonga 7-5 7-6.

The Frenchman was in trouble after going down a break early in the first set, but rallied well to overcome a dogged performance from his countryman.

Elsewhere, Frenchman Fabrice Santoro thrilled the home crowd by crushing world number three Novak Djokovic 6-3 6-2.

Djokovic, a revelation this season with five titles and a final appearance at the U.S. Open, was a shadow of his brilliant best.

Holder Nikolay Davydenko beat Juan Martin del Potro 7-6 6-1 in his first match since being fined US$2,000 (�976) for not trying hard enough during his defeat by Marin Cilic at the St Petersburg Open.

The Russian number four seed recovered from a slow start to put Argentine Del Potro under severe pressure and eventually raced through the match to set up a third-round tie against Marcos Baghdatis.

606: DEBATE The race to Shanghai

The Cypriot dug deep in his match against 13th seed Ivan Ljubicic, coming through 6-4 7-6.

Nadal, meanwhile, will meet Stanislas Wawrinka after the Swiss beat Argentine Juan Ignacio Chela 6-3 6-1.

David Nalbandian kept alive his slim hopes of qualifying for the prestigious season-ending Masters Cup with a straight-sets 6-4 6-4 win over Carlos Moya to set up a meeting with Federer.

The Argentine, who is 22nd in the race to finish in the top eight of the ATP rankings and qualify for Shanghai, must realistically win the event and hope his rivals suffer early exits.

Federer has already qualified for Shanghai, along with Nadal, Djokovic, Davydenko, Andy Roddick and David Ferrer.