The human DNA mismatch repair (MMR) protein MLH1 has essential roles in the correction of replication errors and the activation of cell cycle checkpoints and cytotoxic responses to DNA damage that contribute to suppression of cancer risk. MLH1 functions as a heterodimer with the PMS2 protein, and steady state levels of PMS2 are very low in MLH1-deficient cells. Unique to MLH1 among MutL-homolog proteins, and conserved in identified eukaryotic MLH1 proteins, is the so-called C-terminal homology domain (CTH). The function of these C-terminal 20-30 amino acids is not known. We investigated the effect of a C-terminal truncation of human MLH1 (MLH1-L749X) on mammalian MMR by testing its activity in MLH1-deficient cells. We found the CTH to be essential for suppression of spontaneous mutation, activation of a cytotoxic response to 6-thioguanine, and maintenance of normal steady state levels of PMS2. Co-expression in doubly mutant Mlh1-/-; Pms2-/- fibroblasts showed that MLH1-L749X was unable to stabilize PMS2. Over-expression of MLH1-L749X did not reduce stabilization of PMS2 mediated by wild-type MLH1, indicating that truncation of the CTH reduces the ability to compete with wild-type MLH1 for interaction with PMS2. Lack of PMS2 stabilization also was observed with a previously reported pathogenic truncation (MLH1-Y750X), but not with two different point mutations in the CTH. Biochemical assays demonstrated that truncation of the CTH reduced the stability of heterodimers, although MLH1-L749X retained significant capacity for interaction with PMS2. Thus, the CTH of human MLH1 is necessary for error correction, checkpoint signaling, and for promoting interaction with, and the stability of, PMS2. Analysis of the CTH role in stabilizing PMS2 was facilitated by a novel intracellular assay for MLH1-PMS2 interaction. This assay should prove useful for identifying additional amino acids in MLH1 and PMS2 necessary for interaction in cells, and for determining the functional consequences of MLH1 mutations identified in human cancers.