Formation of membrane-less organelles via liquid-liquid phase separation is one way cells meet the biological requirement for spatiotemporal regulation of cellular components and reactions. Recently, tau, a protein known for its involvement in Alzheimer's disease and other tauopathies, was found to undergo liquid-liquid phase separation making it one of several proteins associated with neurodegenerative diseases to do so. Here, we demonstrate that tau forms dynamic liquid droplets in vitro at physiological protein levels upon molecular crowding in buffers that resemble physiological conditions. Tau droplet formation is significantly enhanced by disease-associated modifications, including the AT8 phospho-epitope and the P301L tau mutation linked to an inherited tauopathy. Moreover, tau droplet dynamics are significantly reduced by these modified forms of tau. Extended phase separation promoted a time-dependent adoption of toxic conformations and oligomerization, but not filamentous aggregation. P301L tau protein showed the greatest oligomer formation following extended phase separation. These findings suggest that phase separation of tau may facilitate the formation of non-filamentous pathogenic tau conformations.