The fusion domain of human immunodeficiency virus (HIV-1) envelope glycoprotein (gp120-gp41) is a conserved hydrophobic region located at the N terminus of the transmembrane glycoprotein (gp41). A V2E mutant has been shown to dominantly interfere with wild-type envelope-mediated syncytium formation and virus infectivity. To understand this phenomenon, a 33-residue peptide (wild type, WT) identical to the N-terminal segment of gp41 and its V2E mutant were synthesized, fluorescently labeled, and characterized. Both peptides inhibited HIV-1 envelope-mediated cell-cell fusion and had similar alpha-helical content in membrane mimetic environments. Studies with fluorescently labeled peptide analogues revealed that both peptides have high affinity for phospholipid membranes, are susceptible to digestion by proteinase-K in their membrane-bound state, and tend to self- and coassemble in the membranes. In SDS-polyacrylamide gel electrophoresis the WT peptide formed dimers as well as higher order oligomers, whereas the V2E mutant only formed dimers. The WT, but not the V2E mutant, induced liposome aggregation, destabilization, and fusion. Moreover, the V2E mutant inhibited vesicle fusion induced by the WT peptide, probably by forming inactive heteroaggregates. These data form the basis for an explanation of the mechanism by which the gp41 V2E mutant inhibits HIV-1 infectivity in cells when co-expressed with WT gp41.