Accumulation of unfolded proteins in the lumen of the endoplasmic reticulum activates a signal transduction cascade that culminates in the transcriptional induction of genes encoding adaptive functions. One proximal sensor for this unfolded protein response is the protein kinase/endoribonuclease IRE1alpha. IRE1alpha is a type-I transmembrane glycoprotein for which the N-terminal luminal domain (NLD) senses the accumulation of unfolded proteins. Previously we demonstrated that the NLD forms a stable ligand-independent dimer linked by disulfide bridges. In this report we have identified the cysteine residues responsible for intermolecular disulfide bonding. However, this covalent interaction was not required for dimerization and/or signaling, suggesting that a cryptic dimer interface exists in the NLD that is independent of covalent disulfide interactions. Limited proteolysis of the NLD revealed characteristic fragments, all retaining the same N-terminal sequences as full-length NLD. Biochemical and functional studies using NLD truncation mutants indicated that the dimerization domain of the NLD is confined to the conserved motifs at the N-terminal regions where putative hydrophobic interactions exist. In addition, the peptide binding domain of the endoplasmic reticulum protein chaperone BiP interacted with the N-terminal region within the NLD. Our findings suggest that the NLD has at least two distinct types of interactions mediating dimerization and function in signaling, i.e. covalent interactions involving disulfide bond formation and hydrophobic interactions, with the hydrophobic interaction being the driving force for dimerization.