Although histone deacetylases (HDACs) are generally viewed as corepressors, we show that HDAC1 serves as a coactivator for the glucocorticoid receptor (GR). Furthermore, a subfraction of cellular HDAC1 is acetylated after association with the GR, and this acetylation event correlates with a decrease in promoter activity. HDAC1 in repressed chromatin is highly acetylated, while the deacetylase found on transcriptionally active chromatin manifests a low level of acetylation. Acetylation of purified HDAC1 inactivates its deacetylase activity, and mutation of the critical acetylation sites abrogates HDAC1 function in vivo. We propose that hormone activation of the receptor leads to progressive acetylation of HDAC1 in vivo, which in turn inhibits the deacetylase activity of the enzyme and prevents a deacetylation event that is required for promoter activation. These findings indicate that HDAC1 is required for the induction of some genes by the GR, and this activator function is dynamically modulated by acetylation.