The mean-field-like gauge-invariant variational method formulated rece
ntly is applied to topologically massive QED in three dimensions. We f
ind that the theory has a phase transition in the Chern-Simons coeffic
ient n. The phase transition is of the Berezinsky-Kosterlitz-Thouless
type and is triggered by the liberation of Polyakov monopoles, which f
or n>8 are tightly bound into pairs. In our Hamiltonian approach this
is seen as a similar behavior of the magnetic vortices, which are pres
ent in the ground state wave functional of the compact theory. For n>8
, the low energy behavior of the theory is the same as in the noncompa
ct case. For n<8 there are no propagating degrees of freedom on distan
ce scales larger than the ultraviolet cutoff. The distinguishing prope
rty of the n<8 phase is that the magnetic flux symmetry is spontaneous
ly broken.