The role and mechanism of formation of lipid domains in a functional membrane have generally received limited attention. Our approach, based on the hypothesis that thermodynamic coupling between lipid-lipid and protein-lipid interactions can lead to domain formation, uses a combination of an experimental lipid bilayer model system and Monte Carlo computer simulations of a simple model of that system. The experimental system is a fluid bilayer composed of a binary mixture of phosphatidylcholine (PC) and phosphatidylserine (PS), containing 4% of a pyrene-labeled anionic phospholipid. Addition of the C2 protein motif (a structural domain found in proteins implicated in eukaryotic signal transduction and cellular trafficking processes) to the bilayer first increases and then decreases the excimer/monomer ratio of the pyrene fluorescence. We interpret this to mean that protein binding induces anionic lipid domain formation until the anionic lipid becomes saturated with protein. Monte Carlo simulations were performed on a lattice representing the lipid bilayer to which proteins were added. The important parameters are an unlike lipid-lipid interaction term and an experimentally derived preferential protein-lipid interaction term. The simulations support the experimental conclusion and indicate the existence of a maximum in PS domain size as a function of protein concentration. Thus, lipid-protein coupling is a possible mechanism for both lipid and protein clustering on a fluid bilayer. Such domains could be precursors of larger lipid-protein clusters ('rafts'), which could be important in various biological processes such as signal transduction at the level of the cell membrane.