The intracellular basic region/helix-loop-helix (bHLH) dioxin receptor mediates signal transduction by dioxin (2, 3, 7, 8-tetrachlorodibenzo-p-dioxin) and functions as a ligand-activated DNA binding protein directly interacting with target genes by binding to dioxin response elements. Here we show that the partially purified, ligand-bound receptor alone could not bind target DNA. In contrast, DNA binding by the receptor could be induced by addition of a cytosolic auxiliary activity which functionally and biochemically corresponded to the bHLH factor Arnt. While Arnt exhibited no detectable affinity for the dioxin response element in the absence of the dioxin receptor, it strongly promoted the DNA binding function of the ligand-activated but not the ligand-free receptor forms. Arnt also functionally reconstituted in vitro the DNA binding activity of a mutant, nuclear translocation-deficient dioxin receptor phenotype in cytosolic extracts from a dioxin-resistant hepatoma cell line. Importantly, coimmunoprecipitation experiments showed that Arnt physically interacted in solution with the ligand-activated dioxin receptor but failed to heterodimerize with the ligand-free, hsp90-associated receptor form. Mutational analysis suggested that the functional interaction between these two factors occurred via the bHLH motif of Arnt. These data suggest that dioxin receptor activity is governed by a complex pattern of combinatorial regulation involving repression by hsp90 and then by ligand-dependent recruitment of the positive coregulator Arnt. The dioxin receptor system also provides the first example of signal-controlled dimerization of bHLH factors.