Pseudouridylation of snRNAs in vertebrates is guided by small nucleolar/Cajal body-specific RNAs (sno/scaRNAs). We developed an in vitro system using cell extracts and single site-radiolabeled U2 snRNAs to study pseudouridylation in Saccharomyces cerevisiae. Micrococcal nuclease-treated cell extracts are fully competent to catalyze U2 pseudouridylation, suggesting an RNA-independent process. A pseudouridylase activity for Psi(35) within yeast U2 is identified via a screen of an S.cerevisiae GST-ORF protein library. This activity is associated with YOR243c ORF, which has not previously been assigned function. When the GST-YOR243c protein is expressed in Escherichia coli, pseudouridylation activity is comparable to that expressed in S.cerevisiae, demonstrating that this protein (designated Pus7) alone can catalyze Psi(35) formation in U2. Both in vitro and in vivo analyses using wild-type and pus7-Delta strains show that Pus7 is indispensable for Psi(35) formation in U2. Using site-specific radiolabeled U2 and U2 fragments, we show that Pus7 activity is specific for Psi(35) and that the U2 stem- loop II region is essential for the pseudouridylation reaction. A BLAST search revealed Pus7 homologs in various organisms.