The transcription of genes encoding soluble proteins that reside in the endoplasmic reticulum (ER) is induced when unfolded proteins accumulate in the ER. Thus, an intracellular signal transduction pathway must exist that mediates communication between the ER lumen and the nucleus. We have identified a gene in S. cerevisiae, IRE1, that is required for this pathway: ire1- mutants cannot activate transcription of KAR2 and PDI1, which encode the ER resident proteins BiP and protein disulfide isomerase. Moreover, IRE1 is essential for cell viability under stress conditions that cause unfolded proteins to accumulate in the ER. IRE1 encodes a transmembrane serine/threonine kinase that we propose transmits the unfolded protein signal across the ER or inner nuclear membrane. IRE1 is also required for inositol prototrophy, suggesting that the induction of ER resident proteins is coupled to the biogenesis of new ER membrane.