Rapid turnover of nonsense-containing mRNAs in yeast in dependent on the product of the UPF1 gene (Upf1p). Mutations in UPF1 lead to the selective stabilization of mRNAs containing early nonsense mutations without affecting the decay rates of most other mRNAs. To identify other integral components of this decay pathway, we have employed a two-hybrid screen, seeking those cellular factors that specifically interact with Upf1p. Screening of yeast genomic libraries identified six genes encoding potential Upf1p-interacting proteins. These include four previously uncharacterized genes, NMD1-4 (nonsense-mediated mRNA decay), DBP2, a gene encoding a putative RNA helicase with homology to mammalian p68 RNA helicase, and SNP1, a gene encoding a U1 snRNP 70-kD protein homolog. In this paper we report the identification and characterization of NMD2, a yeast gene that encodes a specific Upf1p-interacting protein. Disruption of NMD2 yields a nonsense-mediated mRNA decay phenotype identical to that obtained in UPF1-deletion strains, indicating that the NMD2 gene product (Nmd2p) is a new factor in the nonsense-mediated mRNA decay pathway. Deletion analysis demonstrated that the acidic carboxyl terminus of Nmd2p constituted the Upf1p-interacting domain. High-level expression of a fragment of Nmd2p containing this domain had a dominant-negative effect on nonsense-mediated mRNA decay when the protein was localized the cytoplasm but not when it was localized to the nucleus, indicating that this decay pathway has a cytoplasmic component. The association of a dominant-negative phenotype with a gene fragment identified in a two-hybrid screen suggests a generalized approach to confirming the function of genes identified in such screens.