PRKR-like endoplasmic reticulum kinase (PERK) is one of the major sensor proteins that detect protein folding imbalances during endoplasmic reticulum (ER) stress. However, it remains unclear how ER stress activates PERK to initiate a downstream unfolded protein response (UPR). Here, we found that PERK's luminal domain can recognize and selectively interact with misfolded proteins but not with native proteins. Screening a phage-display library, we identified a peptide substrate, P16, of the PERK luminal domain and confirmed that P16 efficiently competes with misfolded proteins for binding this domain. To unravel the mechanism by which the PERK luminal domain interacts with misfolded proteins, we determined the crystal structure of the bovine PERK luminal domain complexed with P16 to 2.8-Å resolution. The structure revealed that PERK's luminal domain binds the peptide through a conserved hydrophobic groove. Substitutions within hydrophobic regions of the PERK luminal domain abolished the binding between PERK and misfolded proteins. We also noted that peptide binding results in major conformational changes in the PERK luminal domain that may favor PERK oligomerization. The structure of the PERK luminal domain-P16 complex suggested stacking of the luminal domain that leads to PERK oligomerization and activation via autophosphorylation after ligand binding. Collectively, our structural and biochemical results strongly support a ligand-driven model in which the PERK luminal domain interacts directly with misfolded proteins to induce PERK oligomerization and activation, resulting in ER stress signaling and the UPR.,© 2018 by The American Society for Biochemistry and Molecular Biology, Inc.