In the yeast Saccharomyces cerevisiae, vacuolar proteins such as carboxypeptidase Y transit from the Golgi to the lysosome-like vacuole via an endosome-like intermediate compartment. The vacuolar protein sorting (vps) mutant vps28, a member of the "class E" vps mutants, accumulates vacuolar, endocytic, and late Golgi markers in an aberrant endosome-like class E compartment. Sequence analysis of VPS28 revealed an open reading frame predicted to encode a hydrophilic protein of 242 amino acids. Consistent with this, polyclonal antiserum raised against Vps28p recognized a cytoplasmic protein of 28 kDa. Disruption of VPS28 resulted in moderate defects in both biosynthetic traffic and endocytic traffic destined for the vacuole. The transport of soluble vacuolar hydrolases to the vacuole was impaired in vps28 null mutant cells (approximately 40-50% carboxypeptidase Y missorted). Internalization of the endocytic marker FM 4-64, a vital lipophilic dye, resulted in intense staining of a small intracellular compartment adjacent to an enlarged vacuole in delta vps28 cells. Furthermore, the vacuolar H+-ATPase accumulated in the perivacuolar class E compartment in delta vps28 cells, as did a-factor receptor Ste3p that was internalized from the plasma membrane. Electron microscopic analysis revealed the presence of a novel compartment consisting of stacks of curved membrane cisternae. Immunolocalization studies demonstrated that the vacuolar H+-ATPase is associated with this cupped cisternal structure, indicating that it corresponds to the class E compartment observed by fluorescence microscopy. Our data indicate that kinetic defects in both anterograde and retrograde transport out of the prevacuolar compartment in vps28 mutants result in the accumulation of protein and membrane in an exaggerated multilamellar endosomal compartment. We propose that Vps28p, as well as other class E Vps proteins, may facilitate (possibly as coat proteins) the formation of transport intermediates required for efficient transport out of the prevacuolar endosome.