Small heat shock proteins (sHsps) are a conserved protein family, with members found in all organisms analysed so far. Several sHsps have been shown to exhibit chaperone activity and protect proteins from irreversible aggregation in vitro. Here we show that Hsp26, an sHsp from Saccharomyces cerevisiae, is a temperature-regulated molecular chaperone. Like other sHsps, Hsp26 forms large oligomeric complexes. At heat shock temperatures, however, the 24mer chaperone complex dissociates. Interestingly, chaperone assays performed at different temperatures show that the dissociation of the Hsp26 complex at heat shock temperatures is a prerequisite for efficient chaperone activity. Binding of non-native proteins to dissociated Hsp26 produces large globular assemblies with a structure that appears to be completely reorganized relative to the original Hsp26 oligomers. In this complex one monomer of substrate is bound per Hsp26 dimer. The temperature-dependent dissociation of the large storage form of Hsp26 into a smaller, active species and the subsequent re-association to a defined large chaperone-substrate complex represents a novel mechanism for the functional activation of a molecular chaperone.