Gene duplication and divergence is a major driver in the emergence of evolutionary novelties. How variations in amino acid sequences lead to loss of ancestral activity and functional diversification of proteins is poorly understood. We used cross-species functional analysis of Drosophila Labial and its mouse HOX1 orthologs (HOXA1, HOXB1, and HOXD1) as a paradigm to address this issue. Mouse HOX1 proteins display low (30%) sequence similarity with Drosophila Labial. However, substituting endogenous Labial with the mouse proteins revealed that HOXA1 has retained essential ancestral functions of Labial, while HOXB1 and HOXD1 have diverged. Genome-wide analysis demonstrated similar DNA-binding patterns of HOXA1 and Labial in mouse cells, while HOXB1 binds to distinct targets. Compared with HOXB1, HOXA1 shows an enrichment in co-occupancy with PBX proteins on target sites and exists in the same complex with PBX on chromatin. Functional analysis of HOXA1-HOXB1 chimeric proteins uncovered a novel six-amino-acid C-terminal motif (CTM) flanking the homeodomain that serves as a major determinant of ancestral activity. In vitro DNA-binding experiments and structural prediction show that CTM provides an important domain for interaction of HOXA1 proteins with PBX. Our findings show that small changes outside of highly conserved DNA-binding regions can lead to profound changes in protein function.