Ursodeoxycholic acid (UDCA, ursodiol) is used to prevent damage to the liver in patients with primary biliary cirrhosis. The drug also prevents the progression of colorectal cancer and the recurrence of high-grade colonic dysplasia. However, the molecular mechanism by which UDCA elicits its beneficial effects is not entirely understood. The aim of this study was to determine whether ileal bile acid binding protein (IBABP) has a role in mediating the effects of UDCA. We find that UDCA binds to a single site on IBABP and increases the affinity for major human bile acids at a second binding site. As UDCA occupies one of the bile acid binding sites on IBABP, it reduces the cooperative binding that is often observed for the major human bile acids. Furthermore, IBABP is necessary for the full activation of farnesoid X receptor α (FXRα) by bile acids, including UDCA. These observations suggest that IBABP may have a role in mediating some of the intestinal effects of UDCA.