We have investigated events following treatment of cells with interferon-gamma (IFN-gamma) that lead to the immediate transcriptional activation of an inducible gene. A gamma-interferon activation factor (GAF) was activated in the cytoplasm of human fibroblasts immediately after IFN-gamma treatment and bound to a newly identified target DNA sequence, the gamma-interferon activation site (GAS). The time course of activation of GAF was different in fibroblasts and HeLa cells and correlated well with IFN-gamma-induced transcriptional activation in both cell types. IFN-gamma-dependent activation of GAF also occurred in enucleated cells (cytoplasts), showing that an inactive cytoplasmic precursor is converted to the active factor. These findings support the concept that ligand-specific signals originating at the cell surface are transmitted through latent cytoplasmic proteins which are activated to bind specific DNA sites and then move to the nucleus to activate the transcription of specific sets of genes.