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This paper proposes a modified four-leg distribution static compensator (DSTATCOM) topology for compensation of unbalanced and nonlinear loads in three-phase four-wire distribution system. DSTATCOM, connected in parallel to the load, supplies reactive and harmonic powers demanded by unbalanced nonlinear loads. In this proposed topology, the voltage source inverter (VSI) of DSTATCOM is connected to point of common coupling (point of interconnection of source, load, DSTATCOM) through interface inductor and series capacitance, unlike the conventional topology which consists of interface inductor alone. Load compensation with a lower value of input DC link voltage of VSI is possible in this modified topology compared to conventional topology. A comparative study on modified and conventional topologies in terms of voltage rating of inverter power switches, switching losses in VSI and power rating of input DC capacitor of VSI is presented. The detailed design aspects of DC link capacitor and interface series capacitor are also presented. The reference filter currents are generated using instantaneous symmetrical component theory and are tracked using hysteresis current control technique. A detailed simulation study is carried out, to compare the compensation performances of conventional, modified topologies using PSCAD simulator and experimental studies are done to validate the simulation results. [ABSTRACT FROM AUTHOR]