The Gal4 protein represents a universally functional transcription activator, which in yeast is regulated by protein-protein interaction of its transcription activation domain with the inhibitor Gal80. Gal80 inhibition is relieved via galactose-mediated Gal80-Gal1-Gal3 interaction. The Gal4-Gal80-Gal1/3 regulatory module is conserved between Saccharomyces cerevisiae and Kluyveromyces lactis. Here we demonstrate that K. lactis Gal80 (KlGal80) is a nuclear protein independent of the Gal4 activity status, whereas KlGal1 is detected throughout the entire cell, which implies that KlGal80 and KlGal1 interact in the nucleus. Consistently KlGal1 accumulates in the nucleus upon KlGAL80 overexpression. Furthermore, we show that the KlGal80-KlGal1 interaction blocks the galactokinase activity of KlGal1 and is incompatible with KlGal80-KlGal4-AD interaction. Thus, we propose that dissociation of KlGal80 from the AD forms the basis of KlGal4 activation in K. lactis. Quantitation of the dissociation constants for the KlGal80 complexes gives a much lower affinity for KlGal1 as compared with Gal4. Mathematical modeling shows that with these affinities a switch based on competition between Gal1 and Gal4 for Gal80 binding is nevertheless efficient provided two monomeric Gal1 molecules interact with dimeric Gal80. Consistent with such a mechanism, analysis of the sedimentation behavior by analytical ultracentrifugation demonstrates the formation of a heterotetrameric KlGal80-KlGal1 complex of 2:2 stoichiometry.