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In Photoshop you can select two objects, then press CTRL-G to group the layers, but in Photoshop Elements (8) it seems you can just merge layers which is a more permanent way to connect them without the same features as grouping.

Is there another way to group layers in Photoshop elements or does this feature not exist?

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I think there is - it's called Sets if it is indeed what you're looking for.

I'm trying to figure out how to separate them, myself. Not working for me.

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Groups were introduced in version CS of Photoshop. In previous version you can only link Layer. To achieve that CTRL+click on layers that you want to link, right click and select link. This is not the same, you cannot fast hide unhide laters like in groups. But still you can isolate layer by alt+clicing on eye on left of layer.

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