A video, uploaded to YouTube, shows 2.5lb Nancy making quick work of showing five sheep who is boss, reports the Daily Telegraph.
Owner Ali Taylor, who trains rescued border collies at Battersea, said the dog was always interested in watching border collies herd sheep.
"One day I decided to give her a whirl in the ring and she picked it up straight away," she said.
"I started in a very controlled environment but it quickly became evident that Nancy has natural ability and loves herding sheep."
The Chihuahua was taken to the rescue centre at just three weeks old with severe skin disease and had to be hand-reared.
Ms Taylor added: "People sometimes under-estimate rescue dogs, but they really are fantastic, and go on to do amazing things."
The charity stresses that no-one should try sheep herding without expert supervision.