Accumulation of unfolded proteins in the endoplasmic reticulum activates an intracellular signal transduction program termed the Unfolded Protein Response (UPR). In mammalian cells, the UPR is signaled in part through dimerization of ER membrane-localized IRE1alpha to activate its protein kinase and endoribonuclease activities. Activated IRE1alpha cleaves XBP1 mRNA at two sites to initiate an unconventional splicing reaction. The 5' and 3' fragments are subsequently joined by an RNA ligase activity, thereby removing a 26 base intron. This splicing reaction creates a translational frame-shift to produce a functional XBP1 transcription factor. However, the cellular location and physiological processes required for splicing of XBP1 mRNA are not well characterized. To study these processes, XBP1 mRNAs were engineered in which translation of enhanced green fluorescence protein (EGFP) or luciferase required splicing of the XBP1 intron. Using cell lines that continuously or transiently express these reporter constructs, we show that cytoplasmic unspliced XBP1 mRNA is efficiently spliced by activated IRE1alpha and requires ongoing cellular transcription but not active translation. The XBP1 intron was effectively removed from RNA substrates transcribed from T7 RNA polymerase or delivered directly to the cytoplasm by RNA transfection, thus indicating that the splicing reaction does not require nuclear processing of the RNA substrate. Analysis of nuclear and cytoplasmic RNA fractions demonstrated that XBP1 mRNA splicing occurs in the cytoplasm. Moreover, an artificial Fv-IRE1alphadeltaN was engineered that was able to splice XBP1 mRNA upon chemical-induced dimerization. These findings demonstrate that IRE1alpha dimerization is sufficient to activate XBP1 mRNA splicing in the absence of the UPR. We propose that XBP1 mRNA cytoplasmic splicing provides a novel mechanism to rapidly induce translation of a transcription factor in response to a specific stimulus.