The mechanism of signal transduction by the estrogen receptor (ER) is complex and not fully understood. In addition to the ER, a number of accessory proteins are apparently required to efficiently transduce the steroid hormone signal. In the absence of estradiol, the ER, like other steroid receptors, is complexed with Hsp90 and other molecular chaperone components, including an immunophilin, and p23. This Hsp90-based chaperone complex is thought to repress the ER's transcriptional regulatory activities while maintaining the receptor in a conformation that is competent for high-affinity steroid binding. However, a role for p23 in ER signal transduction has not been demonstrated. Using a mutant ER (G400V) with decreased hormone binding capacity as a substrate in a dosage suppression screen in yeast cells (Saccharomyces cerevisiae), we identified the yeast homologue of the human p23 protein (yhp23) as a positive regulator of ER function. Overexpression of yhp23 in yeast cells increases ER transcriptional activation by increasing estradiol binding in vivo. Importantly, the magnitude of the effect of yhp23 on ER transcriptional activation is inversely proportional to the concentration of both ER and estradiol in the cell. Under conditions of high ER expression, ER transcriptional activity is largely independent of yhp23, whereas at low levels of ER expression, ER transcriptional activation is primarily dependent on yhp23. The same relationship holds for estradiol levels. We further demonstrate that yhp23 colocalizes with the ER in vivo. Using a yhp23-green fluorescent protein fusion protein, we observed a redistribution of yhp23 from the cytoplasm to the nucleus upon coexpression with ER. This nuclear localization of yhp23 was reversed by the addition of estradiol, a finding consistent with yhp23's proposed role as part of the aporeceptor complex. Expression of human p23 in yeast partially complements the loss of yhp23 function with respect to ER signaling. Finally, ectopic expression of human p23 in MCF-7 breast cancer cells increases both hormone-dependent and hormone-independent transcriptional activation by the ER. Together, these results strongly suggest that p23 plays an important role in ER signal transduction.