Protein conformational switches are widely used in biosensing. They are often composed of an input domain (which binds a target ligand) fused to an output domain (which generates an optical readout). A central challenge in designing such switches is to develop mechanisms for coupling the input and output signals via conformational changes. Here, we create a biosensor in which binding-induced folding of the input domain drives a conformational shift in the output domain that results in a sixfold green-to-yellow ratiometric fluorescence change in vitro and a 35-fold intensiometric fluorescence increase in cultured cells. The input domain consists of circularly permuted FK506 binding protein (cpFKBP) that folds upon binding its target ligand (FK506 or rapamycin). cpFKBP folding induces the output domain, an engineered green fluorescent protein (GFP) variant, to replace one of its β-strands (containing T203 and specifying green fluorescence) with a duplicate β-strand (containing Y203 and specifying yellow fluorescence) in an intramolecular exchange reaction. This mechanism employs the loop-closure entropy principle, embodied by the folding of the partially disordered cpFKBP domain, to couple ligand binding to the GFP color shift. This study highlights the high-energy barriers present in GFP folding which cause β-strand exchange to be slow and are also likely responsible for the shift from the β-strand exchange mechanism in vitro to ligand-induced chromophore maturation in cells. The proof-of-concept design has the advantages of full genetic encodability and potential for modularity. The latter attribute is enabled by the natural coupling of binding and folding and circular permutation of the input domain, which theoretically allows different binding domains to be compatible for insertion into the GFP surface loop.