We examined how remote enhancers establish physical communication with target promoters to activate gene transcription in response to environmental signals. Although the natural IFN-beta enhancer is located immediately upstream of the core promoter, it also can function as a classical enhancer element conferring virus infection-dependent activation of heterologous promoters, even when it is placed several kilobases away from these promoters. We demonstrated that the remote IFN-beta enhancer "loops out" the intervening DNA to reach the target promoter. These chromatin loops depend on sequence-specific transcription factors bound to the enhancer and the promoter and thus can explain the specificity observed in enhancer-promoter interactions, especially in complex genetic loci. Transcription factor binding sites scattered between an enhancer and a promoter can work as decoys trapping the enhancer in nonproductive loops, thus resembling insulator elements. Finally, replacement of the transcription factor binding sites involved in DNA looping with those of a heterologous prokaryotic protein, the lambda repressor, which is capable of loop formation, rescues enhancer function from a distance by re-establishing enhancer-promoter loop formation.