ABSTRACT: The seven transmembrane alpha-helices of G protein-coupled receptors (GPCRs) are the hallmark of this superfamily. Intrahelical interactions are critical to receptor assembly and, for the GPCR subclass that binds small molecules, ligand binding. Most research has focused on identifying the ligand binding pocket within the helical bundle, whereas the role of the extracellular loops remains undefined. Molecular modeling of the cannabinoid receptor 1 (CB1) extracellular loop 2 (EC2), however, suggests that EC2 is poised for key interactions. To test this possibility, we employed alanine scanning mutagenesis of CB1 EC2 and identified two distinct regions critical for ligand binding, G protein coupling activity, and receptor trafficking. Receptors with mutations in the N terminus of EC2 (W255A, N256A) were retained in the endoplasmic reticulum and did not bind the agonist (1R,3R,4R)-3-[2-hydroxy-4-(1,1-dimethylheptyl)-phenyl]-4-(3-hydroxypropyl)cyclohexan-1-ol (CP55940) or the inverse agonist N-(piperidin-1-yl)-5-(4-chlorophenyl)-1-(2,4-dichlorophenyl)-4-methyl-1H-pyrazole-3-carboxamide(SR141716A). In contrast, the C terminus of EC2 differentiates agonist and inverse agonist; the P269A, H270A, and I271A receptors exhibited diminished binding for several agonists but bound inverse agonists SR141716A, N-(piperidin-1-yl)-5-(4-iodophenyl)-1-(2,4-dichlorophenyl)-4-methyl-1H-pyrazole-3-carboxamide (AM251), and 4-[6-methoxy-2-(4-methoxyphenyl)benzofuran-3-carbonyl]benzonitrile (LY320135) with wild-type receptor affinity. The F268A receptor involving substitution in the Cys-X-X-X-Ar motif, displayed both impaired localization and ligand binding. Other amino acid substitutions at position 268 revealed that highly hydrophobic residues are required to accomplish both functions. It is noteworthy that a F268W receptor was trafficked to the cell surface yet displayed differential binding preference for inverse agonists comparable with the P269A, H270A, and I271A receptors. The findings are consistent with a dual role for EC2 in stabilizing receptor assembly and in ligand binding.