The secreted, multidomain protein follistatin binds activins with high affinity, inhibiting their receptor interaction. We have dissected follistatin's domain structure and shown that the minimal activin-inhibiting fragment of follistatin is comprised of the first and second Fs domains (Fs12). This protein can bind to activin dimer and form a stable complex containing two Fs12 molecules and one activin dimer. We have solved crystal structures of activin A alone and its complex with Fs12 fragment to 2 A resolution. The complex structure shows how Fs12 molecules wrap around the back of the 'wings' of activin, blocking the type II receptor-binding site on activin A. Arginine 192 in Fs2 is a key residue in this interaction, inserting itself in between activin's fingers. Complex formation imposes a novel orientation for the EGF- and Kazal-like subdomains in the Fs2 domain and activin A shows further variation from the canonical TGF-beta family fold. The structure provides a detailed description of the inhibitory mechanism and gives insights into interactions of follistatin with other TGF-beta family proteins.