Defects exist in almost all materials(1) and defect engineering at the atomic level is part of modern semiconductor technology(2,3). Defects and their long-range strain fields can have a negative impact on the host materials(4,5). In materials with confined dimensions, the influence of defects can be even more pronounced due to the enhanced relative volume of the 'defective' regions. Here we report the dislocation-induced polarization instability of (001)-oriented Pb(Zr0.52Ti0.48)O-3(PZT) nanoislands, with an average height of similar to9 nm, grown on compressive perovskite substrates. Using quantitative high-resolution electron microscopy(4), we visualize the strain fields of edge-type misfit dislocations, extending predominantly into a PZT region with a height of similar to4 nm and width of similar to8 nm. The lattice within this region deviates from the regular crystal structure. Piezoresponse force microscopy indicates that such PZT nanoislands do not show ferroelectricity. Our results suggest that misfit engineering is indispensable for obtaining nanostructured ferroelectrics with stable polarization.