Speaking to MTV News, the actor claimed that Fanning will one day rank among the most acclaimed icons in the history of cinema.
"I certainly think that Dakota Fanning may be the best actor ever, on the planet, throughout history," Nelson said.
He then joked: "I don't know, either she's a pituitary mutant, or maybe she's an alien."
The actor then praised today's crop of young stars, adding that he hopes they have the chance to explore a variety of roles over the course of their respective careers.
"I think there are a number of really gifted actors and actresses working today, and you just hope that they get the opportunity to grow as they get older and to not be pigeonholed as this kind of actor or actress," he added.
In the 1980s, Nelson was a member of a group of stars known as the 'Brat Pack' alongside Demi Moore, Molly Ringwald and Rob Lowe among others.
Fanning will next appear in The Twilight Saga: Breaking Dawn: Part 1, which is released on November 18 in US and UK cinemas.