The endoplasmic reticulum (ER) of eukaryotic cells contains an abundant 78,000-Da protein (BiP) that is involved in the translocation, folding, and assembly of secretory and transmembrane proteins. In the yeast Saccharomyces cerevisiae, as in mammalian cells, BiP mRNA is synthesized at a high basal rate and is further induced by the presence of increased amounts of unfolded proteins in the ER. However, unlike mammalian BiP, yeast BiP is also induced severalfold by heat shock, albeit in a transient fashion. To identify the regulatory sequences that respond to these stimuli in the yeast KAR2 gene that encodes BiP, we have cloned a 1.3-kb segment of DNA from the region upstream of the sequences coding for BiP and fused it to a reporter gene, the Escherichia coli beta-galactosidase gene. Analysis of a series of progressive 5' truncations as well as internal deletions of the upstream sequence showed that the information required for accurate transcriptional regulation of the KAR2 gene in S. cerevisiae is contained within a approximately 230-bp XhoI-DraI fragment (nucleotides -245 to -9) and that this fragment contains at least two cis-acting elements, one (heat shock element [HSE]) responding to heat shock and the other (unfolded protein response element [UPR]) responding to the presence of unfolded proteins in the ER. The HSE and UPR elements are functionally independent of each other but work additively for maximum induction of the yeast KAR2 gene. Lying between these two elements is a GC-rich region that is similar in sequence to the consensus element for binding of the mammalian transcription factor Sp1 and that is involved in the basal expression of the KAR2 gene. Finally, we provide evidence suggesting that yeast cells monitor the concentration of free BiP in the ER and adjust the level of transcription of the KAR2 gene accordingly; this effect is mediated via the UPR element in the KAR2 promoter.