The Rho GDP-dissociation inhibitors (GDIs) negatively regulate Rho-family GTPases. The inhibitory activity of GDI derives both from an ability to bind the carboxy-terminal isoprene of Rho family members and extract them from membranes, and from inhibition of GTPase cycling between the GTP- and GDP-bound states. Here we demonstrate that these binding and inhibitory functions of rhoGDI can be attributed to two structurally distinct regions of the protein. A carboxy-terminal folded domain of relative molecular mass 16,000 (M[r] 16K) binds strongly to the Rho-family member Cdc42, yet has little effect on the rate of nucleotide dissociation from the GTPase. The solution structure of this domain shows a beta-sandwich motif with a narrow hydrophobic cleft that binds isoprenes, and an exposed surface that interacts with the protein portion of Cdc42. The amino-terminal region of rhoGDI is unstructured in the absence of target and contributes little to binding, but is necessary to inhibit nucleotide dissociation from Cdc42. These results lead to a model of rhoGDI function in which the carboxy-terminal binding domain targets the amino-terminal inhibitory region to GTPases, resulting in membrane extraction and inhibition of nucleotide cycling.