Genetic analysis of late Golgi membrane protein localization in Saccharomyces cerevisiae has uncovered a large number of genes (called GRD) that are required for retention of A-ALP, a model late Golgi membrane protein. Here we describe one of the GRD genes, VPSS/GRD2, that encodes a hydrophilic protein similar to human sorting nexin-1, a protein involved in trafficking of the epidermal growth factor receptor. In yeast cells containing a vps5 null mutation the late Golgi membrane proteins A-ALP and Kex2p were rapidly mislocalized to the vacuolar membrane. A-ALP was delivered to the vacuole in vps5 mutants in a manner independent of a block in the early endocytic pathway. vps5 null mutants also exhibited defects in both vacuolar morphology and in sorting of a soluble vacuolar protein, carboxypeptidase Y. The latter defect is apparently due to an inability to localize the carboxypeptidase Y sorting receptor, Vps10p, to the Golgi since it is rapidly degraded in the vacuole in vps5 mutants. Fractionation studies indicate that Vps5p is distributed between a free cytosolic pool and a particulate fraction containing Golgi, transport vesicles, and possibly endosomes, but lacking vacuolar membranes. Immunofluorescence microscopy experiments show that the membrane-associated pool of Vps5p localizes to an endosome-like organelle that accumulates in the class E vps27 mutant. These results support a model in which Vps5p is required for retrieval of membrane proteins from a prevacuolar/late endosomal compartment back to the late Golgi apparatus.