A tool holder has a rotatable drive sleeve adapted to receive therein a tool and having a pair of diametrically opposed slots disposed axially along part of its length. A key extends inwardly into each slot and is movable through its sot for retaining and rotatably driving the tool. The slots have an axial length greater than that of the keys which are slidable axially there along. A locking collar, having an internal surface diverging progressively outwardly over at least a portion of its length in the axial direction, encircles the sleeve and is movable axially in one direction for locking the keys in engagement with the tool, and in the opposite direction to allow disengagement of the tool. The action of the divergent surface portion on the keys enables the keys to be locked in position over a range of inward penetrations to accommodate tools having driving recesses of different depths. A stop member is rotatable on the sleeve between two positions, which cause the slots to have a shorter or longer effective length, respectively, to change the tool holder from rotary only mode to hammer mode. A coil spring urges the locking collar away from the stop member. A circumferential spring may be incorporated to urge the keys radially inwards, inward motion being limited by shoulders on the keys.