Phosphorylation of eukaryotic initiation factor-2 (eIF2) by pancreatic eIF2 kinase (PEK), induces a program of translational expression in response to accumulation of malfolded protein in the endoplasmic reticulum (ER). This study addresses the mechanisms activating PEK, also designated PERK or EIF2AK3. We describe the characterization of two regions in the ER luminal portion of the transmembrane PEK that carry out distinct functions in the regulation of this eIF2 kinase. The first region mediates oligomerization between PEK polypeptides, and deletion of this portion of PEK blocked induction of eIF2 kinase activity. The second characterized region of PEK facilitates interaction with ER chaperones. In the absence of stress, PEK associates with ER chaperones GRP78 (BiP) and GRP94, and this binding is released in response to ER stress. ER luminal sequences flanking the transmembrane domain are required for GRP78 interaction, and deletion of this portion of PEK led to its activation even in the absence of ER stress. These results suggest that this ER chaperone serves as a repressor of PEK activity, and release of ER chaperones from PEK when misfolded proteins accumulate in the ER induces gene expression required to enhance the protein folding capacity of the ER.