The endoplasmic reticulum (ER) communicates with the nucleus through the unfolded protein response (UPR), which senses accumulation of unfolded proteins in the ER lumen and leads to increased transcription of genes encoding ER-resident chaperones. As a key regulatory step in this signaling pathway, the mRNA encoding the UPR-specific transcription factor Hac1p becomes spliced by a unique mechanism that requires tRNA ligase but not the spliceosome. Splicing is initiated upon activation of Ire1p, a transmembrane kinase that lies in the ER and/or inner nuclear membrane. We show that Ire1p is a bifunctional enzyme: in addition to being a kinase, it is a site-specific endoribonuclease that cleaves HAC1 mRNA specifically at both splice junctions. The addition of purified tRNA ligase completes splicing; we therefore have reconstituted HAC1 mRNA splicing in vitro from purified components.