In this paper we explore the idea that the chiral phase transition in QCD can be described as a transition from a disordered instanton liquid to a strongly correlated phase of polarized instantonanti-instanton molecules. We calculate the degree of polarization of the molecules as a function of the temperature and show that the resulting T dependence of the fermion determinant drives the chiral phase transition. We also show how the polarization of the molecules can lead to a nontrivial behavior of the energy density and pressure. Finally, we study the effect of the presence of molecules on the propagation of quarks at T -T,. We derive the corresponding effective interaction and find that the strength in the scalar-pseudoscalar channel is four times the strength in the vector-axialvector channel which agrees with recent lattice QCD simulations. We give results for the quark condensates as well as mesonic and baryonic correlation functions and find that the "screening masses" of chiral partners become equal for T > T,, where we still observe substantial attraction in the scalar-pseudoscalar meson channels. PACS number(s): 12.38. Lg, ll.lO.Wx, 12.38.Gc, 12.39.Fe