To elucidate the earliest molecular steps in the activation of transcription by the progesterone receptor (PR), we investigated its activity in a cell-free transcription system utilizing chromatin templates. PR prepared as a ligand-free, recombinant protein failed to induce transcription on chromatin templates. However, transcriptional competence could be restored by coincubation with rabbit reticulocyte lysate (RRL). The interaction of PR with chaperones results in a receptor conformation competent to bind ligand and RRL contains abundant chaperone-mediated protein folding activity. Blocking this activity with the specific inhibitor geldanamycin inhibited receptor-dependent transcriptional activity. However, recombinant chaperones could not replace RRL in the restoration of transcriptional activity on chromatin templates, suggesting the presence of an additional activity in the lysate. Under chromatin assembly conditions, PR could bind naked DNA and RRL did not increase that binding. In contrast, PR bound to a chromatin template only poorly. Interestingly, RRL stimulated sequence-specific binding by PR to target sites in chromatin and the concomitant recruitment of the steroid receptor coactivator 1 to the promoter. Thus, our results indicate that a novel protein-mediated activity in RRL is involved in an additional, heretofore unrecognized, activation step required for PR to become transcriptionally competent on chromatin templates.