BACKGROUND: Gene duplication is the primary source of new genes with novel or altered functions. It is known that duplicates may obtain these new functional roles by evolving divergent expression patterns and/or protein functions after the duplication event. Here, using yeast (Saccharomyces cerevisiae) as a model organism, we investigate a previously little considered mode for the functional diversification of duplicate genes: subcellular adaptation of encoded proteins. RESULTS: We show that for 24-37% of duplicate gene pairs derived from the S. cerevisiae whole-genome duplication event, the two members of the pair encode proteins that localize to distinct subcellular compartments. The propensity of yeast duplicate genes to evolve new localization patterns depends to a large extent on the biological function of their progenitor genes. Proteins involved in processes with a wider subcellular distribution (for example, catabolism) frequently evolved new protein localization patterns after duplication, whereas duplicate proteins limited to a smaller number of organelles (for example, highly expressed biosynthesis/housekeeping proteins with a slow rate of evolution) rarely relocate within the cell. Paralogous proteins evolved divergent localization patterns by partitioning of ancestral localizations ('sublocalization'), but probably more frequently by relocalization to new compartments ('neolocalization'). We show that such subcellular reprogramming may occur through selectively driven substitutions in protein targeting sequences. Notably, our data also reveal that relocated proteins functionally adapted to their new subcellular environments and evolved new functional roles through changes of their physico-chemical properties, expression levels, and interaction partners. CONCLUSION: We conclude that protein subcellular adaptation represents a common mechanism for the functional diversification of duplicate genes.