We engineered a novel ligand-regulated peptide (LiRP) system where the binding activity of intracellular peptides is controlled by a cell-permeable small molecule. In the absence of ligand, peptides expressed as fusions in an FKBP-peptide-FRB-GST LiRP scaffold protein are free to interact with target proteins. In the presence of the ligand rapamycin, or the nonimmunosuppressive rapamycin derivative AP23102, the scaffold protein undergoes a conformational change that prevents the interaction of the peptide with the target protein. The modular design of the scaffold enables the creation of LiRPs through rational design or selection from combinatorial peptide libraries. Using these methods, we identified LiRPs that interact with three independent targets: retinoblastoma protein, c-Src, and the AMP-activated protein kinase. The LiRP system should provide a general method to temporally and spatially regulate protein function in cells and organisms.