Condensin, a conserved member of the SMC protein family of ring‐shaped multi‐subunit protein complexes, is essential for structuring and compacting chromosomes. Despite its key role, its molecular mechanism has remained largely unknown. Here, we employ single‐molecule magnetic tweezers to measure, in real time, the compaction of individual DNA molecules by the budding yeast condensin complex. We show that compaction can proceed in large steps, driving DNA molecules into a fully condensed state against forces of up to 2 pN. Compaction can be reversed by applying high forces or adding buffer of high ionic strength. While condensin can stably bind DNA in the absence of ATP, ATP hydrolysis by the SMC subunits is required for rendering the association salt insensitive and for the subsequent compaction process. Our results indicate that the condensin reaction cycle involves two distinct steps, where condensin first binds DNA through electrostatic interactions before using ATP hydrolysis to encircle the DNA topologically within its ring structure, which initiates DNA compaction. The finding that both binding modes are essential for its DNA compaction activity has important implications for understanding the mechanism of chromosome compaction.