FK506-binding protein 51 (FKBP51) regulates the activity of the glucocorticoid receptor (GR), and is therefore a key mediator of the biological actions of glucocorticoids. However, the understanding of the molecular mechanisms that govern its activity remains limited. Here, we uncover a novel regulatory switch for GR activity by the post-translational modification of FKBP51 with small ubiquitin-like modifier (SUMO). The major SUMO-attachment site, lysine 422, is required for FKBP51-mediated inhibition of GR activity in hippocampal neuronal cells. Importantly, impairment of SUMO conjugation to FKBP51 impacts on GR-dependent neuronal signaling and differentiation. We demonstrate that SUMO conjugation to FKBP51 is enhanced by the E3 ligase PIAS4 and by environmental stresses such as heat shock, which impact on GR-dependent transcription. SUMO conjugation to FKBP51 regulates GR hormone-binding affinity and nuclear translocation by promoting FKBP51 interaction within the GR complex. SUMOylation-deficient FKBP51 fails to interact with Hsp90 and GR thus facilitating the recruitment of the closely related protein, FKBP52, which enhances GR transcriptional activity. Moreover, we show that the modification of FKBP51 with SUMO modulates its binding to Hsp90. Our data establish SUMO conjugation as a novel regulatory mechanism in the Hsp90 cochaperone activity of FKBP51 with a functional impact on GR signaling in a neuronal context.