The yeast galactose switch operated by the Gal4p–Gal80p–Gal3p regulatory module is a textbook model of transcription regulation in eukaryotes. The Gal80 protein inhibits Gal4p-mediated transcription activation by binding to the transcription activation domain. InSaccharomyces cerevisiae, inhibition is relieved by formation of an alternative Gal80–Gal3 complex. In yeasts lacking a Gal3p ortholog, such asKluyveromyces lactis, the Gal1 protein (KlGal1p) combines regulatory and enzymatic activity. The data presented here reveal a yet unknown role of the KlGal80 N terminus in the mechanism of Gal4p activation. The N terminus contains an NLS, which is responsible for nuclear accumulation of KlGal80p and KlGal1p and for KlGal80p-mediated galactokinase inhibition. Herein, we present a model where the N terminus of KlGal80p reaches the catalytic center of KlGal1p causing enzyme inhibition in the nucleus and stabilization of the KlGal1–KlGal80p complex. We corroborate this model by genetic analyses and structural modelling and provide a rationale for the divergent evolution of the mechanism activating Gal4p.