Smith, opening up the tournament against January's Players Championship Finals winner, bounced back from a first round exit in the World Matchplay in style to move into the last 16.
He trailed 2-1 early in the game, having won the opening leg with a 70 finish only to miss a dart to take the second as Nicholson levelled on double four and hit a 180 and a bullseye finish to move ahead.
Smith, though, took out 120 to square the match and then followed up a double eight finish - after four misses from Nicholson - with a 12-darter to take a 4-2 lead.
Nicholson took the advantage in the seventh with another maximum, but five more missed doubles allowed Smith in on double five to move a leg away from victory.
Nicholson then hit two 180s in the next leg, but further missed doubles allowed Smith in for a chance to seal the win - only for him to then waste four match darts as double one kept the world number 16 in the game.
The pair traded maximum scores in the next, but four further misses from Nicholson gave Smith another chance, and this time he posted double 16 to take victory.
"I scored really well but missed a lot of doubles," said Smith, who faces Phil Taylor or Co Stompe in round two.
"I've had a bad leg recently and that means I've not practised as much as I'd have wanted before this but I was determined to do well and I managed to get through to victory."

REIGNING PartyPoker.net European Championship winner Phil Taylor made a winning start to the defence of his title with a 6-2 win over Co Stompe on Thursday night.
Taylor has won the previous two stagings of the European Championship and was in clinical mood at the Stadthalle in Dinslaken as he bids to claim Sunday's £50,000 first prize.
Stompe gave Taylor some edgy moments in the opening five legs, but three missed darts to level the game in the sixth allowed the Stoke legend to put daylight between the duo before winning the next two without reply to seal victory.
"It was a difficult game but a very good game too," he said. "I kept putting him under pressure and it worked for me.
"Co played well but I picked up on him missing doubles and under pressure he was doing that.
"The Dutch players are very competitive and Co epitomises that. He works hard at his game and it showed because he made me work very hard."
Taylor will now face Andy Smith in the second round on Saturday, after the Studley-based thrower knocked out Paul Nicholson 6-3 in Germany.
World number four Mervyn King crashed out of the tournament with a 6-3 defeat to Barrie Bates, who took a 5-0 lead and held off a brief fightback to claim victory.
Bates takes on Jamie Caven in round two, after the Derby man came from 2-0 down to see off Scotland's Gary Anderson 6-2 in their clash.
Jelle Klaasen also produced a spirited comeback to defeat Vincent van der Voort 6-4 in the battle of the Dutch aces, having included finishes of 142 and 92 in coming from 3-1 down to take the win.
Klaasen meets Mark Walsh in the second round, with the number eight seed having overcome Spanish debutant Antonio Alcinas 6-3, despite trailing the newcomer - who hit a 160 finish - 3-2 midway through the game.
Germany's Andree Welge also threatened an upset in his clash with world number five Terry Jenkins, coming from 4-2 down to level before the English star took the last two legs in style.
Simon Whitlock set up a tasty last 16 meeting with Jenkins on Saturday with his 6-3 win over two-time World Champion Dennis Priestley.
The first round concludes on Friday night at the Stadthalle in Dinslaken with the remaining eight matches, which include number two seed Raymond van Barneveld's meeting with Andy Hamilton.
World number three James Wade faces Colin Lloyd, Adrian Lewis takes on Wayne Jones and German pair Bernd Roith and Tomas Seyler are in action on home soil when they take on Denis Ovens and Michael van Gerwen.