OR1 is a member of the steroid/thyroid hormone nuclear receptor superfamily which has been described to mediate transcriptional responses to retinoids and oxysterols. On a DR4 response element, an OR1 heterodimer with the nuclear receptor retinoid X receptor alpha (RXR alpha) has been described to convey transcriptional activation in both the absence and presence of the RXR ligand 9-cis retinoic acid, the mechanisms of which have remained unclear. Here, we dissect the effects of RXR alpha and OR1 ligand-binding domain interaction on transcriptional regulation and the role of the respective carboxy-terminal activation domains (AF-2s) in the absence and presence of the RXR ligand, employing chimeras of the nuclear receptors containing the heterologous GAL4 DNA-binding domain as well as natural receptors. The results show that the interaction of the RXR and OR1 ligand-binding domains unleashes a transcription activation potential that is mainly dependent on the AF-2 of OR1, indicating that interaction with RXR activates OR1. This defines dimerization-induced activation as a novel function of heterodimeric interaction and mechanism of receptor activation not previously described for nuclear receptors. Moreover, we present evidence that activation of OR1 occurs by a conformational change induced upon heterodimerization with RXR.