Targeted recruitment of histone acetyltransferase (HAT) activities by sequence-specific transcription factors, including the retinoic acid receptors (RARs) and retinoid X receptors (RXRs), has been proposed to lead to destabilization of nucleosomal cores by acetylation of core histones. However, biochemical evidence indicates that destabilization and depletion of linker H1 histones must also occur at the promoter regions of actively transcribing genes. Mechanisms by which nuclear receptors and other transcription factors affect the removal of histone H1 from transcriptionally silent chromatin have not been previously described. In this report, we show that RARs interact in a ligand-dependent manner with HMG-I, which is known to displace histone H1 from chromatin. We further show that HMG-I and a novel related protein, HMG-R, also interact with other transcription factors. Using sense and antisense constructs of HMG-I/R in transient transfection assays with a retinoid responsive reporter, we also demonstrate that HMG-I/R is important for retinoid dependent transcriptional activity of RAR. These findings suggest a step wise mechanism by which RARs and other transcription factors can cause a targeted unfolding of compact chromatin as a first step in transcriptional activation, which would then be followed by recruitment of HAT activity and subsequent events.