Cytochrome b5 is inserted posttranslationally into membranes in vivo and spontaneously into liposomes in vitro by a short carboxyl-terminal hydrophobic membrane-anchoring sequence. DNA corresponding to this hydrophobic sequence has been synthesized, and two gene fusions with the Escherichia coli enzyme beta-galactosidase have been constructed by locating the hydrophobic domain in one case at the EcoRI site near the C terminus and in the other at the normal C terminus of the enzyme. The latter fusion protein was enzymatically active, having approximately 50% of the specific activity of beta-galactosidase, and cells expressing this protein grew normally with lactose as the sole carbon source. Both fusion proteins were localized to the E. coli inner membrane, converting beta-galactosidase from a cytoplasmic enzyme to a membrane-associated enzyme. The hydrophobic domain of cytochrome b5 therefore contains the information required to target polypeptides containing this domain to the membrane. Use of the cytochrome b5 hydrophobic peptide, either alone or in conjunction with other localizing sequences such as signal sequences, provides a general procedure for associating proteins with membranes. Polypeptides bearing this hydrophobic peptide may have considerable use as pharmaceuticals when associated with liposomes or cellular membranes.