diff --git a/src/lib/autocomplete/autocomplete-trigger.ts b/src/lib/autocomplete/autocomplete-trigger.ts
index 6d3c550022fc..228f047c5fc1 100644
--- a/src/lib/autocomplete/autocomplete-trigger.ts
+++ b/src/lib/autocomplete/autocomplete-trigger.ts
@@ -306,6 +306,7 @@ export class MdAutocompleteTrigger implements ControlValueAccessor, OnDestroy {
    */
   private _setValueAndClose(event: MdOptionSelectionChange | null): void {
     if (event) {
+      this._clearPreviousSelectedOption(event.source);
       this._setTriggerValue(event.source.value);
       this._onChange(event.source.value);
     }
@@ -313,6 +314,17 @@ export class MdAutocompleteTrigger implements ControlValueAccessor, OnDestroy {
     this.closePanel();
   }
 
+  /**
+   * Clear any previous selected option and emit a selection change event for this option
+   */
+  private _clearPreviousSelectedOption(skip: MdOption) {
+    this.autocomplete.options.forEach((option) => {
+      if (option != skip && option.selected) {
+        option.deselect();
+      }
+    });
+  }
+
   private _createOverlay(): void {
     this._portal = new TemplatePortal(this.autocomplete.template, this._viewContainerRef);
     this._overlayRef = this._overlay.create(this._getOverlayConfig());
diff --git a/src/lib/autocomplete/autocomplete.spec.ts b/src/lib/autocomplete/autocomplete.spec.ts
index 7118f73ae3cb..87c63b3385f6 100644
--- a/src/lib/autocomplete/autocomplete.spec.ts
+++ b/src/lib/autocomplete/autocomplete.spec.ts
@@ -898,6 +898,69 @@ describe('MdAutocomplete', () => {
 
   });
 
+  describe('Option selection', () => {
+    let fixture: ComponentFixture<SimpleAutocomplete>;
+
+    beforeEach(() => {
+      fixture = TestBed.createComponent(SimpleAutocomplete);
+      fixture.detectChanges();
+
+      fixture.componentInstance.trigger.openPanel();
+      fixture.detectChanges();
+    });
+
+    it('should deselect any other selected option', async(() => {
+      let options =
+          overlayContainerElement.querySelectorAll('md-option') as NodeListOf<HTMLElement>;
+      options[0].click();
+      fixture.detectChanges();
+
+      fixture.whenStable().then(() => {
+        fixture.detectChanges();
+
+        let componentOptions = fixture.componentInstance.options.toArray();
+        expect(componentOptions[0].selected)
+            .toBe(true, `Clicked option should be selected.`);
+
+        options =
+            overlayContainerElement.querySelectorAll('md-option') as NodeListOf<HTMLElement>;
+        options[1].click();
+        fixture.detectChanges();
+
+        expect(componentOptions[0].selected)
+            .toBe(false, `Previous option should not be selected.`);
+        expect(componentOptions[1].selected)
+            .toBe(true, `New Clicked option should be selected.`);
+
+      });
+    }));
+
+    it('should call deselect only on the previous selected option', async(() => {
+      let options =
+          overlayContainerElement.querySelectorAll('md-option') as NodeListOf<HTMLElement>;
+      options[0].click();
+      fixture.detectChanges();
+
+      fixture.whenStable().then(() => {
+        fixture.detectChanges();
+
+        let componentOptions = fixture.componentInstance.options.toArray();
+        componentOptions.forEach(option => spyOn(option, 'deselect'));
+
+        expect(componentOptions[0].selected)
+            .toBe(true, `Clicked option should be selected.`);
+
+        options =
+            overlayContainerElement.querySelectorAll('md-option') as NodeListOf<HTMLElement>;
+        options[1].click();
+        fixture.detectChanges();
+
+        expect(componentOptions[0].deselect).toHaveBeenCalled();
+        componentOptions.slice(1).forEach(option => expect(option.deselect).not.toHaveBeenCalled());
+      });
+    }));
+  });
+
   describe('misc', () => {
 
     it('should allow basic use without any forms directives', () => {