Small GTPases of the rab family are involved in the regulation of vesicular transport. It is believed that cycling between the GTP- and GDP-bound forms, and accessory factors regulating this cycling are crucial for rab function. However, an essential role for rab nucleotide exchange factors has not yet been demonstrated. In this report we show the requirement of nucleotide exchange factor activity for Ypt1 GTPase mediated protein transport. The Ypt1 protein, a member of the rab family, plays a role in targeting vesicles to the acceptor compartment and is essential for the first two steps of the yeast secretory pathway. We use two YPT1 dominant mutations that contain alterations in a highly conserved GTP-binding domain, N121I and D124N. YPT1-D124N is a novel mutation that encodes a protein with nucleotide specificity modified from guanine to xanthine. This provides a tool for the study of an individual rab GTPase in crude extracts: a xanthosine triphosphate (XTP)-dependent conditional dominant mutation. Both mutations confer growth inhibition and a block in protein secretion when expressed in vivo. The purified mutant proteins do not bind either GDP or GTP. Moreover, they completely inhibit the ability of the exchange factor to stimulate nucleotide exchange for wild type Ypt1 protein, and are potent inhibitors of ER to Golgi transport in vitro at the vesicle targeting step. The inhibitory effects of the Ypt1-D124N mutant protein on both nucleotide exchange activity and protein transport in vitro can be relieved by XTP, indicating that it is the nucleotide-free form of the mutant protein that is inhibitory. These results suggest that the dominant mutant proteins inhibit protein transport by sequestering the exchange factor from the wild type Ypt1 protein, and that this factor has an essential role in vesicular transport.