A dynamical instability is observed in experimental studies on micro-channels of rectangular cross-section with smallest dimension 100 and 160 µm in which one of the walls is made of soft gel. There is a spontaneous transition from an ordered, laminar flow to a chaotic and highly mixed flow state when the Reynolds number increases beyond a critical value. The critical Reynolds number, which decreases as the elasticity modulus of the soft wall is reduced, is as low as 200 for the softest wall used here (in contrast to 1200 for a rigid-walled channel). The instability onset is observed by the breakup of a dye-stream introduced in the centre of the micro-channel, as well as the onset of wall oscillations due to laser scattering from fluorescent beads embedded in the wall of the channel. The mixing time across a channel of width 1.5 mm, measured by dye-stream and outlet conductance experiments, is smaller by a factor of 10 5 than that for a laminar flow. The increased mixing rate comes at very little cost, because the pressure drop (energy requirement to drive the flow) increases continuously and modestly at transition. The deformed shape is reconstructed numerically, and computational fluid dynamics (CFD) simulations are carried out to obtain the pressure gradient and the velocity fields for different flow rates. The pressure difference across the channel predicted by simulations is in agreement with the experiments (within experimental errors) for flow rates where the dye stream is laminar, but the experimental pressure difference is higher than the simulation prediction after dye-stream breakup. A linear stability analysis is carried out using the parallel-flow approximation, in which the wall is modelled as a neo-Hookean elastic solid, and the simulation results for the mean velocity and pressure gradient from the CFD simulations are used as inputs. The stability analysis accurately predicts the Reynolds number (based on flow rate) at which an instability is observed in the dye stream, and it also predicts that the instability first takes place at the downstream converging section of the channel, and not at the upstream diverging section. The stability analysis also indicates that the destabilization is due to the modification of the flow and the local pressure gradient due to the wall deformation; if we assume a parabolic velocity profile with the pressure gradient given by the plane Poiseuille law, the flow is always found to be stable.