Yeast p20 is a small, acidic protein that binds eIF4E, the cap-binding protein. It has been proposed to affect mRNA translation and degradation, however p20's function as an eIF4E-binding protein (4E-BP) and its physiological significance has not been clearly established. In this paper we present data demonstrating that p20 is capable of binding directly to mRNA due to electrostatic interaction of a stretch of arginine and histidine residues in the protein with negatively charged phosphates in the mRNA backbone. This interaction contributes to formation of a ternary eIF4E/p20/capped mRNA complex that is more stable than complexes composed of capped mRNA bound to eIF4E in the absence of p20. eIF4E/p20 complex was found to have a more pronounced stimulatory effect on capped mRNA translation than purified eIF4E alone. Addition of peptides containing the eIF4E-binding domains present in p20 (motif YTIDELF), in eIF4G (motif YGPTFLL) or Eap1 (motif YSMNELY) completely inhibited eIF4E-dependent capped mRNA translation (in vitro), but had a greatly reduced inhibitory effect when eIF4E/p20 complex was present. We propose that the eIF4E/p20/mRNA complex serves as a stable depository of mRNAs existing in a dynamic equilibrium with other complexes such as eIF4E/eIF4G (required for translation) and eIF4E/Eap1 (required for mRNA degradation).