STATs are activated by tyrosine phosphorylation on cytokine stimulation. A tyrosine-phosphorylated STAT forms a functional dimer through reciprocal Src homology 2 domain (SH2)-phosphotyrosyl peptide interactions. IFN treatment induces the association of PIAS1 and Stat1, which results in the inhibition of Stat1-mediated gene activation. The molecular basis of the cytokine-dependent PIAS1-Stat1 interaction has not been understood. We report here that a region near the COOH terminus of PIAS1 (amino acids 392-541) directly interacts with the NH(2)-terminal domain of Stat1 (amino acids 1-191). A mutant PIAS1 lacking the Stat1-interacting domain failed to inhibit Stat1-mediated gene activation. By using a modified yeast two-hybrid assay, we demonstrated that PIAS1 specifically interacts with the Stat1 dimer, but not tyrosine-phosphorylated or -unphosphorylated Stat1 monomer. In addition, whereas the NH(2)-terminal region of PIAS1 does not interact with Stat1, it serves as a modulatory domain by preventing the interaction of the COOH-terminal domain of PIAS1 with the Stat1 monomer. Thus, the cytokine-induced PIAS1-Stat1 interaction is mediated through the specific recognition of the dimeric form of Stat1 by PIAS1.