It was the second title for Montanes in his sixth final. He won his first in Amersfoort, Netherlands, last July.
Blake was trying to become the first American to win an ATP title on European clay since Andy Roddick at St. Poelten, Austria, in 2003.
The fourth-seeded Blake, who had beaten Russia's Nikolay Davydenko in the semifinal two hours earlier, had the first break in the match in the 12th game of the first set.
Montanes, seeded seventh, battled back in the second set, breaking Blake at love in the seventh game. Blake immediately broke back and then wasted two match points in the 10th game.
With tiredness likely affecting him, Blake lost all three of his service games in the decider.
Blake was forced to complete his 6-7 (3), 7-6 (2), 6-3 victory over Davydenko on Sunday after the previous day's play was suspended because of insufficient light.
It was Blake's seventh straight win over the second-seeded Davydenko, who was playing his fifth tournament of the year after a two-month layoff due to a heel injury.
The match resumed with Blake leading 4-2 in the second set. Three of Sunday's opening five games produced breaks of serve, with Davydenko winning two before Blake comfortably won the tiebreaker.
Blake then broke in the fourth game of the deciding set, which was enough to become the first American since Todd Martin in 1999 to reach the Estoril final.
The women's event was won on Saturday by Yanina Wickmayer of Belgium, who beat Ekaterina Makarova 7-5, 6-2.
