The material, developed by researchers from the University of Cambridge, is made of tiny particles of gold coated in a polymer shell, and then squeezed into microdroplets of water in oil.
When exposed to heat or light, the particles stick together, changing the colour of the material.
Instead of contractile fibres, the colour-changing abilities rely on light-powered nano-mechanisms, and the 'cells' are microscopic drops of water.
"Loading the nanoparticles into the microdroplets allows us to control the shape and size of the clusters, giving us dramatic colour changes," said Dr Andrew Salmon from Cambridge's Cavendish Laboratory.
The geometry of the nanoparticles when they bind into clusters determines which colour they appear as: when the nanoparticles are spread apart they are red and when they cluster together they are dark blue.
However, the droplets of water also compress the particle clusters, causing them to shadow each other and make the clustered state nearly transparent.
At the moment, the material developed by the Cambridge researchers is in a single layer, so is only able to change to a single colour.
However, different nanoparticle materials and shapes could be used in extra layers to make a fully dynamic material, like real chameleon skin.
"This work is a big advance in using nanoscale technology to do biomimicry," said study co-author Sean Cormier in a paper appeared in the journal Advanced Optical Materials.
"We're now working to replicate this on roll-to-roll films so that we can make metres of colour changing sheets," said the researchers.
( With inputs from IANS )