Although changes in gene regulation may play an important role in adaptive evolution, there have been few attempts to investigate the molecular mechanisms responsible for adaptively significant variation in gene expression. Here we describe the mechanism underlying an adaptive difference in the expression of the lactate dehydrogenase-B gene (Ldh-B) between northern and southern populations of the fish Fundulus heteroclitus. Ldh-B regulatory sequences from northern and southern individuals, coupled to a luciferase reporter gene, were introduced into the livers of live fish. Deletion studies indicated that sequence changes between 400 and 500 bp upstream of the transcription start site resulted in a 2-fold difference in reporter gene transcription. These sequence changes can account for the previously observed 2-fold difference in Ldh-B transcription between populations. Variation in transcription factors did not play an important role. Sequences within the functionally important region resemble a mammary tumor virus glucocorticoid responsive element (MTV-GRE) in southern alleles, whereas northern alleles differ from the consensus by 1 bp. To test the hypothesis that this element is involved in the variation between populations of F. heteroclitus, we exposed transiently transgenic fish containing Ldh-B regulatory sequence/reporter gene constructs to handling stress or injected cortisol. Both treatments increased reporter gene transcription driven by southern alleles but not northern alleles, as expected if an MTV-GRE sequence were involved. This finding suggests that sequence variation in a GRE is the cause of the adaptive differences in Ldh-B gene expression between populations and demonstrates that small changes in gene regulatory sequences can have important evolutionary consequences.