Tn5 is unique among prokaryotic transposable elements in that it encodes a special inhibitor protein identical to the Tn5 transposase except lacking a short NH2-terminal DNA binding sequence. This protein regulates transposition through nonproductive protein-protein interactions with transposase. We have studied the mechanism of Tn5 inhibition in vitro and find that a heterodimeric complex between the inhibitor and transposase is critical for inhibition, probably via a DNA-bound form of transposase. Two dimerization domains are known in the inhibitor/transposase shared sequence, and we show that the COOH-terminal domain is necessary for inhibition, correlating with the ability of the inhibitor protein to homodimerize via this domain. This regulatory complex may provide clues to the structures of functional synaptic complexes. Additionally, we find that NH2- and COOH-terminal regions of transposase or inhibitor are in functional contact. The NH2 terminus appears to occlude transposase homodimerization (hypothetically mediated by the COOH terminus), an effect that might contribute to productive transposition. Conversely, a deletion of the COOH terminus uncovers a secondary DNA binding region in the inhibitor protein which is probably located near the NH2 terminus.