Unliganded thyroid hormone receptor (TR) functions as a transcriptional repressor of genes bearing thyroid hormone response elements in their promoters. Binding of hormonal ligand to the receptor releases the transcriptional silencing and leads to gene activation. Previous studies showed that the silencing activity of TR is located within the C-terminal ligand-binding domain (LBD) of the receptor. To dissect the role of the LBD in receptor-mediated silencing, we used a cell-free transcription system containing HeLa nuclear extracts in which exogenously added unliganded TRbeta repressed the basal level of RNA polymerase II-driven transcription from a thyroid hormone response element-linked template. We designed competition experiments with a peptide fragment containing the entire LBD (positions 145 to 456) of TRbeta. This peptide, which lacks the DNA-binding domain, did not affect basal RNA synthesis from the thyroid hormone response element-linked promoter when added to a cell-free transcription reaction mixture. However, the addition of the LBD peptide to a reaction mixture containing TRbeta led to a complete reversal of receptor-mediated transcriptional silencing in the absence of thyroid hormone. An LBD peptide harboring point mutations, which severely impair receptor dimerization, also inhibited efficiently the silencing activity of TR, indicating that the relief of repression by the LBD was not due to the sequestration of TR or its heterodimeric partner retinoid X receptor into inactive homo- or heterodimers. We postulate that the LBD peptide competed with TR for a regulatory molecule, termed a corepressor, that exists in the HeLa nuclear extracts and is essential for efficient receptor-mediated gene repression. We have identified the region from positions 145 to 260 (the D domain) of the LBD as a potential binding site of the putative corepressor. We observed further that a peptide containing the LBD of retinoic acid receptor (RAR) competed for TR-mediated silencing, suggesting that the RAR LBD may bind to the same corepressor activity as the TR LBD. Interestingly, the RAR LBD complexed with its cognate ligand, all-trans retinoic acid, failed to compete for transcriptional silencing by TRbeta, indicating that the association of the LBD with the corepressor is ligand dependent. Finally, we provide strong biochemical evidence supporting the existence of the corepressor activity in the HeLa nuclear extracts. Our studies demonstrated that the silencing activity of TR was greatly reduced in the nuclear extracts preincubated with immobilized, hormone-free glutathione S-transferase-LBD fusion proteins, indicating that the corepressor activity was depleted from these extracts through protein-protein interactions with the LBD. Similar treatment with immobilized, hormone-bound glutathione S-transferase-LBD, on the other hand, failed to deplete the corepressor activity from the nuclear extracts, indicating that ligand binding to the LBD disrupts its interaction with the corepressor. From these results, we propose that a corepressor binds to the LBD of unliganded TR and critically influences the interaction of the receptor with the basal transcription machinery to promote silencing. Ligand binding to TR results in the release of the corepressor from the LBD and triggers the reversal of silencing by allowing the events leading to gene activation to proceed.