The yeast genome sequencing project predicts an open reading frame (YKL073) that would encode a novel member of the Hsp70 family of molecular chaperones. We report that this 881 codon reading frame represents a functional gene expressing a 113-119 kDa glycoprotein localized within the lumen of the endoplasmic reticulum (ER). We therefore propose to designate this gene LHS1 (Lumenal Hsp Seventy). Our studies indicate that LHS1 is regulated by the unfolded protein response pathway, as evidenced by its transcriptional induction in cells treated with tunicamycin, and in various mutants defective in precursor processing (sec11-7, sec53-6 and sec59-1). LHS1 is not essential for viability, but an Lhs1 null mutant strain exhibits a coordinated induction of genes regulated by the unfolded protein response indicating a role for Lhs1p in protein folding in the ER. Furthermore, the null mutation is synthetically lethal in combination with (delta)ire1, thus activation of the unfolded protein response pathway is essential for cells to tolerate loss of Lhs1p. Synthetically lethality is also seen with mutations in KAR2, strongly suggesting that Kar2p and Lhs1p have overlapping functions. The Lhs1 null mutant exhibits a severe constitutive defect in the translocation of several secretory preproteins. We therefore propose that Lhs1p is a molecular chaperone of the ER lumen involved in both polypeptide translocation and subsequent protein folding.