Early in S phase, the vacuole (lysosome) of Saccharomyces cerevisiae projects a stream of vesicles and membranous tubules into the bud where they fuse and establish the daughter vacuole. This inheritance reaction can be studied in vitro with isolated vacuoles. Rapid and efficient homotypic fusion between salt-washed vacuoles requires the addition of only two purified soluble proteins, Sec18p (NSF) and LMA1, a novel heterodimer with a thioredoxin subunit. We now report the identity of the second subunit of LMA1 as I(B)2, a previously identified cytosolic inhibitor of vacuolar proteinase B. Both subunits are needed for efficient vacuole inheritance in vivo and for the LMA1 activity in cell extracts. Each subunit acts via a novel mechanism, as the thioredoxin subunit is not acting through redox chemistry and LMA1 is still needed for the fusion of vacuoles which do not contain proteinase B. Both Sec18p and LMA1 act at an early stage of the in vitro reaction. Though LMA1 does not stimulate Sec18p-mediated Sec17p release, LMA1 cannot fulfill its function before Sec18p. Upon Sec17p/Sec18p action, vacuoles become labile but are rapidly stabilized by LMA1. The action of LMA1 and Sec18p is thus coupled and ordered. These data establish LMA1 as a novel factor in trafficking of yeast vacuoles.