All eukaryotic cells respond to the accumulation of unfolded proteins in the endoplasmic reticulum (ER) by signaling an adaptive pathway termed the unfolded protein response (UPR). In yeast, a type-I ER transmembrane protein kinase, Ire1p, is the proximal sensor of unfolded proteins in the ER lumen that initiates an unconventional splicing reaction on HAC1 mRNA. Hac1p is a transcription factor required for induction of UPR genes. In higher eukaryotic cells, the UPR also induces site-2 protease (S2P)-mediated cleavage of ER-localized ATF6 to generate an N-terminal fragment that activates transcription of UPR genes. To elucidate the requirements for IRE1alpha and ATF6 for signaling the mammalian UPR, we identified a UPR reporter gene that was defective for induction in IRE1alpha-null mouse embryonic fibroblasts and S2P-deficient Chinese hamster ovary (CHO) cells. We show that the endoribonuclease activity of IRE1alpha is required to splice XBP1 (X-box binding protein) mRNA to generate a new C terminus, thereby converting it into a potent UPR transcriptional activator. IRE1alpha was not required for ATF6 cleavage, nuclear translocation, or transcriptional activation. However, ATF6 cleavage was required for IRE1alpha-dependent induction of UPR transcription. We propose that nuclear-localized IRE1alpha and cytoplasmic-localized ATF6 signaling pathways merge through regulation of XBP1 activity to induce downstream gene expression. Whereas ATF6 increases the amount of XBP1 mRNA, IRE1alpha removes an unconventional 26-nucleotide intron that increases XBP1 transactivation potential. Both processing of ATF6 and IRE1alpha-mediated splicing of XBP1 mRNA are required for full activation of the UPR.