SHP (short heterodimer partner) is an unusual orphan nuclear receptor consisting only of a ligand-binding domain, and it exhibits unique features of interaction with conventional nuclear receptors. While the mechanistic basis of these interactions has remained enigmatic, SHP has been suggested to inhibit nuclear receptor activation by at least three alternatives; inhibition of DNA binding via dimerization, direct antagonism of coactivator function via competition, and possibly transrepression via recruitment of putative corepressors. We now show that SHP binds directly to estrogen receptors via LXXLL-related motifs. Similar motifs, referred to as NR (nuclear receptor) boxes, are usually critical for the binding of coactivators to the ligand-regulated activation domain AF-2 within nuclear receptors. In concordance with the NR box dependency, SHP requires the intact AF-2 domain of agonist-bound estrogen receptors for interaction. Mutations within the ligand-binding domain helix 12, or binding of antagonistic ligands, which are known to result in an incomplete AF-2 surface, abolish interactions with SHP. Supporting the idea that SHP directly antagonizes receptor activation via AF-2 binding, we demonstrate that SHP variants, carrying either interaction-defective NR box mutations or a deletion of the repressor domain, have lost the capacity to inhibit agonist-dependent transcriptional estrogen receptor activation. Furthermore, our studies indicate that SHP may function as a cofactor via the formation of ternary complexes with dimeric receptors on DNA. These novel insights provide a mechanistic explanation for the inhibitory role of SHP in nuclear receptor signaling, and they may explain how SHP functions as a negative coregulator or corepressor for ligand-activated receptors, a novel and unique function for an orphan nuclear receptor.