Efficient budding of HIV-1 from the plasma membrane of infected cells requires the function of a 6-kDa protein known as p6. A highly conserved Pro-Thr-Ala-Pro (PTAP) motif (the "late" or "L" domain), is critical for the virus-budding activity of p6. Recently, it was demonstrated that the product of tumor susceptibility gene 101 (TSG101), which contains at its N terminus a domain highly related to ubiquitin-conjugating (E2) enzymes, binds HIV-1 Gag in a p6-dependent fashion. We examined the impact of overexpressing the N-terminal region of TSG101 on HIV-1 particle assembly and release. We observed that this domain (referred to as TSG-5') potently inhibits virus production. Examination of cells coexpressing HIV-1 Gag and TSG-5' by electron microscopy reveals a defect in virus budding reminiscent of that observed with p6 L domain mutants. In addition, the effect of TSG-5' depends on an intact p6 L domain; the assembly and release of virus-like particles produced by Gag mutants lacking a functional p6 PTAP motif is not significantly affected by TSG-5'. Furthermore, assembly and release of murine leukemia virus and Mason-Pfizer monkey virus are insensitive to TSG-5'. TSG-5' is incorporated into virions, confirming the Gag/TSG101 interaction in virus-producing cells. Mutations that inactivate the p6 L domain block TSG-5' incorporation. These data demonstrate a link between the E2-like domain of TSG101 and HIV-1 L domain function, and indicate that TSG101 derivatives can act as potent and specific inhibitors of HIV-1 replication by blocking virus budding.