This paper proposes an improved performance interactive distribution static compensator (DSTATCOM) to address the limitations of conventional current control mode (CCM) and voltage control mode (VCM) operations. The proposed interactive scheme provides smooth transfer of modes of operation while remaining connected in the distribution system. In normal operation, the DSTATCOM operates in CCM to make source currents balanced, sinusoidal, and at a unity power factor. During voltage disturbances, the CCM operation cannot improve load voltage. In that case, DSTATCOM operation is changed to VCM, which maintains a constant voltage across the sensitive loads. Hence, this interactive DSTATCOM ensures continuous, flexible, and robust operation of the load. Moreover, the filter current requirements are reduced in the proposed scheme, which reduces the losses in the filter and feeder, improves inverter efficiency, and requires a reduced-rating inverter for sag mitigation. The principle of operation and control for both operating modes is analyzed. The detailed process of the flexible transfer between the two modes is derived. Deadbeat predictive control algorithms for CCM as well as VCM operation are developed for fast operation during mode transfers. The performance of the proposed scheme is validated by both simulation and experimental results.