Domains of interaction between the p85 and p110 subunits of phosphatidylinositol 3-kinase (PI 3-kinase) were studied with the yeast two-hybrid expression system. A gene fusion between the GAL4 transactivation domain and p85 activated transcription from a GAL1-lacZ reporter gene when complemented with a gene fusion between the GAL4 DNA binding domain and p110. To define subdomains responsible for this interaction, a series of p85 deletion mutants were analyzed. A 192-amino-acid inter-SH2 (IS) fragment (residues 429 to 621) was the smallest determinant identified that specifically associated with p110. In analogous experiments, the subdomain within p110 responsible for interaction with p85 was localized to an EcoRI fragment encoding the amino-terminal 127 residues. Expression of these two subdomains [p85(IS) with p110RI] resulted in 100-fold greater reporter activity than that obtained with full-length p85 and p110. Although the p85(IS) domain conferred a strong interaction with the p110 catalytic subunit, this region was not sufficient to impart phosphotyrosine peptide stimulation of PI 3-kinase activity. In contrast, coexpression of the p110 subunit with full-length p85 or with constructs containing the IS sequences flanked by both SH2 domains of p85 [p85(n/cSH2)] or either of the individual SH2 domains [p85(nSH2+IS) or p85(IS+cSH2)] resulted in PI 3-kinase activity that was activated by a phosphotyrosine peptide. These data suggest that phosphotyrosine peptide binding to either SH2 domain generates an intramolecular signal propagated through the IS region to allosterically activate p110.