Newly synthesized vacuolar hydrolases such as carboxypeptidase Y (CPY) are sorted from the secretory pathway in the late-Golgi compartment and reach the vacuole after a distinct set of membrane-trafficking steps. Endocytosed proteins are also delivered to the vacuole. It has been proposed that these pathways converge at a "prevacuolar" step before delivery to the vacuole. One group of genes has been described that appears to control both of these pathways. Cells carrying mutations in any one of the class E VPS (vacuolar protein sorting) genes accumulate vacuolar, Golgi, and endocytosed proteins in a novel compartment adjacent to the vacuole termed the "class E" compartment, which may represent an exaggerated version of the physiological prevacuolar compartment. We have characterized one of the class E VPS genes, VPS27, in detail to address this question. Using a temperature-sensitive allele of VPS27, we find that upon rapid inactivation of Vps27p function, the Golgi protein Vps10p (the CPY-sorting receptor) and endocytosed Ste3p rapidly accumulate in a class E compartment. Upon restoration of Vps27p function, the Vps10p that had accumulated in the class E compartment could return to the Golgi apparatus and restore correct sorting of CPY. Likewise, Ste3p that had accumulated in the class E compartment en route to the vacuole could progress to the vacuole upon restoration of Vps27p function indicating that the class E compartment can act as a functional intermediate. Because both recycling Golgi proteins and endocytosed proteins rapidly accumulate in a class E compartment upon inactivation of Vps27p, we propose that Vps27p controls membrane traffic through the prevacuolar/endosomal compartment in wild-type cells.