The aryl hydrocarbon receptor (AhR) mediates the toxic and biological effects of 2,3,7,8-tetrachlorodibenzo-p-dioxin and related compounds. In a process termed transformation, ligand binding converts the AhR into its high affinity DNA binding form that represents a dimer of the AhR and Arnt, a closely related nuclear protein. During transformation, protein chaperone Hsp90 is thought to be replaced by Arnt in overlapping binding sites in the basic helix loop helix and PASB domains of the AhR. Here, analysis of AhR variants containing a modified PASB domain and AhR PASA-PASB fragments of various lengths revealed (i) an inhibitory effect on transformation concomitant with Hsp90 binding in the PASB domain, (ii) an ability of the PASA-PASB fragment of the AhR to reproduce key steps in the transformation process, and (iii) a ligand-dependent conformational change in the PASA domain consistent with increased PASA exposure during AhR transformation. Based on these results, we propose a new mechanism of AhR transformation through initiation of Arnt dimerization and Hsp90 displacement in AhR PASA/B domains. This study provides insights into mechanisms of AhR transformation, dimerization of PAS domain proteins, and Hsp90 dissociation in activation of its client proteins.