The AAA domain, a conserved Walker-type ATPase module, is a feature of members of the AAA family of proteins, which are involved in many cellular processes, including vesicular transport, organelle biogenesis, microtubule rearrangement and protein degradation. The function of the AAA domain, however, has not been explained. Membrane-anchored AAA proteases of prokaryotic and eukaryotic cells comprise a subfamily of AAA proteins that have metal-dependent peptidase activity and mediate the degradation of non-assembled membrane proteins. Inactivation of an orthologue of this protease family in humans causes neurodegeneration in hereditary spastic paraplegia. Here we investigate the AAA domain of the yeast protein Yme1, a subunit of the iota-AAA protease located in the inner membrane of mitochondria. We show that Yme1 senses the folding state of solvent-exposed domains and specifically degrades unfolded membrane proteins. Substrate recognition and binding are mediated by the amino-terminal region of the AAA domain. The purified AAA domain of Yme1 binds unfolded polypeptides and suppresses their aggregation. Our results indicate that the AAA domain of Ymel has a chaperone-like activity and suggest that the AAA domains of other AAA proteins may have a similar function.