The orphan nuclear receptor hepatocyte nuclear factor 4 (HNF-4) is required for development and maintenance of the liver phenotype. HNF-4 activates several hepatocyte-specific genes, including the gene encoding apolipoprotein AI (apoAI), the major protein component of plasma high-density lipoprotein. The apoAI gene is activated by HNF-4 through a nuclear receptor binding element (site A) located in its liver-specific enhancer. To decipher the mechanism whereby HNF-4 enhances apoAI gene transcription, we have reconstituted its activity in a cell-free system. Functional HNF-4 was purified to homogeneity from a bacterial expression system. In in vitro transcription assays employing nuclear extract from HeLa cells, which do not contain HNF-4, recombinant HNF-4 stimulated transcription from basal promoters linked to site A. Activation by HNF-4 did not exhibit a ligand requirement, but phosphorylation of HNF-4 in the in vitro transcription system was observed. The activation function of HNF-4 was localized to a domain displaying strong homology to the conserved AF-2 region of nuclear receptors. Dissection of the transcription cycle revealed that HNF-4 activated transcription by facilitating assembly of a preinitiation complex intermediate consisting of TBP, the TATA box-binding protein component of TFIID and TFIID, via direct physical interactions with TFIIB. However, recruitment of TFIIB by HNF-4 was not sufficient for activation, since HNF-4 deletion derivatives lacking AF-2 bound TFIIB. On the basis of these results, HNF-4 appears to activate transcription at two distinct levels. The first step involves AF-2-independent recruitment of TFIIB to the promoter complex; the second step is AF-2 dependent and entails entry of preinitiation complex components acting downstream of TFIIB.