Repression of gene transcription is linked to regulation of chromatin structure through deacetylation of core histone amino-terminal tails. This action is mediated by histone deacetylases (HDACs) that function within active multiprotein complexes directed to the promoters of repressed genes. In vivo, HDAC3 forms a stable complex with the SMRT corepressor. The SMRT-HDAC3 complex exhibits histone deacetylase activity, whereas recombinant HDAC3 is an inactive enzyme. Here we report that SMRT functions as an activating cofactor of HDAC3. In contrast, SMRT does not activate the class II HDAC4, with which it also interacts. Activation of HDAC3 is mediated by a deacetylase activating domain (DAD) that includes one of two SANT motifs present in SMRT. A cognate DAD is present in the related corepressor N-CoR, which can also activate HDAC3. Mutations in the DAD that abolish HDAC3 interaction also eliminate reconstitution of HDAC activity. Using purified components, the SMRT DAD is shown to be necessary and sufficient for activation of HDAC3. Moreover, the DAD is required both for HDAC3 to function enzymatically and for the major repression function of SMRT. Thus, SMRT and N-CoR do not serve merely as platforms for HDAC recruitment but function as an integral component of an active cellular HDAC3 enzyme.