Distribution Static Compensator (DSTATCOM) is used for power factor correction, voltage regulation, load balancing, and harmonic elimination. A DSTATCOM can not fulfill all these objectives simultaneously. In the presented work, authors have proposed a control algorithm for dual functional DSTATCOM that enables it to operate either in current control mode (CCM) or in voltage control mode (VCM). A new control algorithm has been devised that allows DSTATCOM to smoothly switch over from CCM to VCM and vice versa. In VCM it regulates load terminal voltage at a desired magnitude, whereas in CCM it injects reactive and harmonics current such that supply sees unity power factor. PSCAD/EMTDC software is used for extensive simulation studies and results of DSTATCOM operation in VCM, CCM, and transition from one mode to another mode are presented in detail. © 2012 IEEE.