Fatty acid induction of the peroxisomal beta-oxidation machinery in Saccharomyces cerevisiae involves transcriptional control of genes regulated by the oleate response element (ORE). Glucose as the preferred carbon source antagonizes this effect. Induction is dependent on the Zn(2)Cys(6) family members Oaf1p and Pip2p, which bind to this element as a heterodimer. We show here by ectopically expressing both components and LexA fusion derivatives that this transcription factor complex is only active in the presence of oleate. In contrast to Pip2p, Oaf1p is responsive to oleate activation in the absence of the other component of the heterodimer. Therefore, it is the exclusive receptor of the oleate signal. Pip2p is active also under noninducing conditions but is effectively inhibited when complexed with Oaf1p in the absence of inducer. It contributes to the trans-activation properties of the Oaf1p-Pip2p heterodimer and is required for efficient binding of Oaf1p to OREs in vivo. Repression of ORE-dependent transcription by glucose occurs via both Oaf1p and Pip2p. By dissecting functional domains of both proteins, we identified a region required for regulated activity of the C-terminal activation domain. These findings allow us to postulate a model for carbon source-regulated transcription of peroxisomal protein genes.