After endocytosis, some membrane proteins recycle from early endosomes to the plasma membrane whereas others are transported to late endosomes and lysosomes for degradation. Conjugation with the small polypeptide ubiquitin is a signal for lysosomal sorting. Here we show that the hepatocyte growth factor-regulated tyrosine kinase substrate, Hrs, is involved in the endosomal sorting of ubiquitinated membrane proteins. Hrs contains a clathrin-binding domain, and by electron microscopy we show that Hrs localizes to flat clathrin lattices on early endosomes. We demonstrate that Hrs binds directly to ubiquitin by way of a ubiquitin-interacting motif (UIM), and that ubiquitinated proteins localize specifically to Hrs- and clathrin-containing microdomains. Whereas endocytosed transferrin receptors fail to colocalize with Hrs and rapidly recycle to the cell surface, transferrin receptors that are fused to ubiquitin interact with Hrs, localize to Hrs- and clathrin-containing microdomains and are sorted to the degradative pathway. Overexpression of Hrs strongly and specifically inhibits recycling of ubiquitinated transferrin receptors by a mechanism that requires a functional UIM. We conclude that Hrs sorts ubiquitinated membrane proteins into clathrin-coated microdomains of early endosomes, thereby preventing their recycling to the cell surface.