The mammalian tumor susceptibility gene tsg101 encodes the homologue of Vps23p, a class E Vps protein essential for normal membrane trafficking in the late endosome/multivesicular body of yeast. Both proteins assemble into large (∼350 kDa) cytosolic protein complexes and we show that the yeast complex contains another class E Vps protein, Vps28p. tsg101 mutant cells exhibit defects in sorting and proteolytic maturation of the lysosomal hydrolase cathepsin D, as well as in the steady-state distribution of the mannose-6-phosphate receptor. Additionally, endocytosed EGF receptors that are normally sorted to the lysosome are instead rapidly recycled back to the cell surface in tsg101 mutant cells. We propose that tsg101 mutant cells are defective in the delivery of cargo proteins to late endosomal compartments. One consequence of this endosomal trafficking defect is the delayed down-regulation/degradation of activated cell surface receptors, resulting in prolonged signaling. This may contribute to the tumorigenic phenotype exhibited by the tsg101 mutant fibroblasts.