In vivo propagation of [PSI(+)], an aggregation-prone prion isoform of the yeast release factor Sup35 (eRF3), has previously been shown to require intermediate levels of the chaperone protein Hsp104. Here we perform a detailed study on the mechanism of prion loss after Hsp104 inactivation. Complete or partial inactivation of Hsp104 was achieved by the following approaches: deleting the HSP104 gene; modifying the HSP104 promoter that results in low level of its expression; and overexpressing the dominant-negative ATPase-inactive mutant HSP104 allele. In contrast to guanidine-HCl, an agent blocking prion proliferation, Hsp104 inactivation induced relatively rapid loss of [PSI(+)] and another candidate yeast prion, [PIN(+)]. Thus, the previously hypothesized mechanism of prion dilution in cell divisions due to the blocking of prion proliferation is not sufficient to explain the effect of Hsp104 inactivation. The [PSI(+)] response to increased levels of another chaperone, Hsp70-Ssa, depends on whether the Hsp104 activity is increased or decreased. A decrease of Hsp104 levels or activity is accompanied by a decrease in the number of Sup35(PSI+) aggregates and an increase in their size. This eventually leads to accumulation of huge agglomerates, apparently possessing reduced prion forming capability and representing dead ends of the prion replication cycle. Thus, our data confirm that the primary function of Hsp104 in prion propagation is to disassemble prion aggregates and generate the small prion seeds that initiate new rounds of prion propagation (possibly assisted by Hsp70-Ssa).