G-protein-coupled receptors (GPCRs) transduce the signals for a wide range of hormonal and sensory stimuli by activating a heterotrimeric guanine nucleotide-binding protein (G protein). The analysis of loss-of-function and constitutively active receptor mutants has helped to reveal the functional properties of GPCRs and their role in human diseases. Here we describe the identification of a new class of mutants, dominant-negative mutants, for the yeast G-protein-coupled alpha-factor receptor (Ste2p). Sixteen dominant-negative receptor mutants were isolated based on their ability to inhibit the response to mating pheromone in cells that also express wild-type receptors. Detailed analysis of two of the strongest mutant receptors showed that, unlike other GPCR interfering mutants, they were properly localized at the plasma membrane and did not alter the stability or localization of wild-type receptors. Furthermore, their dominant-negative effect was inversely proportional to the relative amount of wild-type receptors and was reversed by overexpressing the G-protein subunits, suggesting that these mutants compete with the wild-type receptors for the G protein. Interestingly, the dominant-negative mutations are all located at the extracellular ends of the transmembrane segments, defining a novel region of the receptor that is important for receptor signaling. Altogether, our results identify residues of the alpha-factor receptor specifically involved in ligand binding and receptor activation and define a new mechanism by which GPCRs can be inactivated that has important implications for the evaluation of receptor mutations in other G-protein-coupled receptors.