The hepatitis C virus E1 and E2 envelope proteins are targeted to the endoplasmic reticulum, but instead of being secreted, they are retained in a pre-Golgi compartment, at least partly in a misfolded state. Since secretory proteins which are retained in the endoplasmic reticulum frequently can activate the transcription of intraluminal chaperone proteins, we measured the effect of the E1 and E2 proteins on the promoters of two such chaperones, GRP78 (BiP) and GRP94. We found that E2 but not E1 protein activates these two promoters, as assayed by a reporter gene system. Furthermore, E2 but not E1 protein induces the synthesis of GRP78 from the endogenous cellular gene. We also found that E2 but not E1 protein expressed in mammalian cells is bound tightly to GRP78. This association may explain the ability of E2 protein to activate transcription, since GRP78 has been postulated to be a sensor of stress in the endoplasmic reticulum. Since overexpression of GRP78 has been shown to decrease the sensitivity of cells to killing by cytotoxic T lymphocytes and to increase tumorigenicity and resistance to antitumor drugs, this activity of E2 protein may be involved in the pathogenesis of hepatitis C virus-induced diseases.