Hormone-dependent transactivation by several of the steroid hormone receptors is potentiated by the Hsp90-associated cochaperone FKBP52, although not by the closely related FKBP51. Here we analyze the mechanisms of potentiation and the functional differences between FKBP51 and FKBP52. While both have peptidyl-prolyl isomerase activity, this is not required for potentiation, as mutations abolishing isomerase activity did not affect potentiation. Genetic selection in Saccharomyces cerevisiae for gain of potentiation activity in a library of randomly mutated FKBP51 genes identified a single residue at position 119 in the N-terminal FK1 domain as being a critical difference between these two proteins. In both the yeast model and mammalian cells, the FKBP51 mutation L119P, which is located in a hairpin loop overhanging the catalytic pocket and introduces the proline found in FKBP52, conferred significant potentiation activity, whereas the converse P119L mutation in FKBP52 decreased potentiation. A second residue in this loop, A116, also influences potentiation levels; in fact, the FKBP51-A116V L119P double mutant potentiated hormone signaling as well as wild-type FKBP52 did. These results suggest that the FK1 domain, and in particular the loop overhanging the catalytic pocket, is critically involved in receptor interactions and receptor activity.