We report on a theoretical study of the pp->p Lambda K+ and pp->p Sigma0 K+ reactions near threshold using a chiral dynamical approach. The production process is described by single-pion and single-kaon exchange. The final state interactions of nucleon-hyperon, K-hyperon and K-nucleon systems are also taken into account. We show that our model leads to a fair description of the experimental data on the total cross section of the pp->p Lambda K+ and pp->p Sigma0 K+ reactions. We find that the experimental observed strong suppression of Sigma0 production compared to Lambda production at the same excess energy can be explained. However, ignorance of phases between some amplitudes does not allow to properly account for the nucleon-hyperon final state interaction for the pp->p Sigma0 K+ reaction. We also demonstrate that the invariant mass distribution and the Dalitz plot provide direct information about the Lambda and Sigma0 production mechanism, and can be tested by experiments at COSY or HIRFL-CSR.