HIV-1 envelope glycoproteins (Envs) mediate virus entry by fusing the viral and target cell membranes, a multi-step process that represents an attractive target for inhibition. Entry inhibitors with broad-range activity against diverse isolates of HIV-1 may be extremely useful as lead compounds for the development of therapies or prophylactic microbicides. To facilitate the identification of such inhibitors, we have constructed a cell-cell fusion system capable of simultaneously monitoring inhibition efficiency and specificity. In this system, effector cells stably express a tetracycline-controlled transactivator (tTA) that enables tightly inducible expression of both HIV-1 Env and the Renilla luciferase (R-Luc) reporter protein. Target cells express the HIV-1 receptors, CD4 and CCR5, and carry the firefly luciferase (F-Luc) reporter gene under the control of a tTA-responsive promoter. Thus, Env-mediated fusion of these two cell types allows the tTA to diffuse to the target cell and activate the expression of the F-Luc protein. The efficiency with which an inhibitor blocks cell-cell fusion is measured by a decrease in the F-Luc activity, while the specificity of the inhibitor is evaluated by its effect on the R-Luc activity. The system exhibited a high dynamic range and high Z'-factor values. The assay was validated with a reference panel of inhibitors that target different steps in HIV-1 entry, yielding inhibitory concentrations comparable to published virus inhibition data. Our system is suitable for large-scale screening of chemical libraries and can also be used for detailed characterization of inhibitory and cytotoxic properties of known entry inhibitors.