The disaccharide trehalose is produced in large quantities by diverse organisms during a variety of stresses. Trehalose prevents proteins from denaturing at high temperatures in vitro, but its function in stress tolerance in vivo is controversial. We report that trehalose stabilizes proteins in yeast cells during heat shock. Surprisingly, trehalose also suppresses the aggregation of denatured proteins, maintaining them in a partially-folded state from which they can be activated by molecular chaperones. The continued presence of trehalose, however, interferes with refolding, suggesting why it is rapidly hydrolyzed following heat shock. These findings reconcile conflicting reports on the role of trehalose in stress tolerance, provide a novel tool for accessing protein folding intermediates, and define new parameters for modulating stress tolerance and protein aggregation.