Liquid-liquid phase separation (LLPS) of proteins into biomolecular condensates has emerged as a fundamental principle underpinning cellular function and malfunction. Indeed, many human pathologies, including protein misfolding diseases, are linked to aberrant liquid-to-solid phase transitions, and disease-associated protein aggregates often nucleate through phase separation. The molecular level determinants that promote pathological phase transitions remain, however, poorly understood. Here we study LLPS of the microtubule-associated protein Tau, whose aberrant aggregation is associated with a number of neurodegenerative diseases, including Alzheimer's disease. Using single molecule spectroscopy, we probe directly the conformational changes that the protein undergoes as a result of LLPS. We perform single-molecule FRET and fluorescence correlation spectroscopy experiments to monitor the intra- and intermolecular changes and demonstrate that the N- and C-terminal regions of Tau become extended, thus exposing the microtubule-binding region. These changes facilitate intermolecular interactions and allow for the formation of nanoscale clusters of Tau. Our results suggest that these clusters can promote the fibrillization of Tau, which can be dramatically accelerated by disease-related mutations P301L and P301S. Our findings thus provide important molecular insights into the mechanism of protein phase separation and the conversion of protein condensates from functional liquid assemblies to pathological aggregates.