The insertion of a stable soluble protein into loops of transmembrane proteins has proved to be a successful approach for enhancing their stabilities and crystallization, and may also be useful in contexts where the inserted proteins can modulate or report on the activities of membrane proteins. While the use of T4 lysozyme to replace portions of the third intracellular loops of G protein-coupled receptors (GPCRs) has allowed determination of the structures of members of this important class of receptors, the creation of such fusion proteins generally leads to loss of signaling function of the resulting fusion protein, since the third intracellular loops of GPCRs play critical roles in their interactions with G proteins. We describe here a random screening approach allowing insertion of T4 lysozyme into diverse positions in the third loop of the yeast α-pheromone receptor, a GPCR encoded by the yeast STE2 gene. Insertions were accompanied by varying extents of deletion or duplication of the loop. A set of phenotypic screens allow detection of potentially rare variant receptors that are expressed, bind to agonist and are capable of signal transduction via activation of the cognate G protein. A large fraction of screened full-length receptor variants containing at least partial duplications of the loop on either side of the inserted T4 lysozyme retain the ability to activate the downstream signaling pathway in response to binding of ligand. However, we were unable to identify any receptors with truncated C-termini that retain significant signaling function in the presence of inserted T4 lysozyme. Our results establish the feasibility of creating functional receptors containing insertions of T4 lysozyme in their third intracellular loops.