Long insertions into a loop of a folded host protein are expected to have destabilizing effects because of the entropic cost associated with loop closure unless the inserted sequence adopts a folded structure with amino- and carboxy-termini in close proximity. A loop entropy reduction screen based on this concept was used in an attempt to retrieve folded sequences from random sequence libraries. A library of long random sequences was inserted into a loop of the SH2 domain, displayed on the surface of M13 phage, and the inserted sequences that did not disrupt SH2 function were retrieved by panning using beads coated with a phosphotyrosine containing SH2 peptide ligand. Two sequences of a library of 2 x 10(8) sequences were isolated after multiple rounds of panning, and were found to have recovery levels similar to the wild-type SH2 domain and to be relatively intolerant to further mutation in PCR mutagenesis experiments. Surprisingly, although these inserted sequences exhibited little nonrandom structure, they do not significantly destabilize the host SH2 domain. Additional insertion variants recovered at lower levels in the panning experiments were also found to have a minimal effect on the stability and peptide-binding function of the SH2 domain. The additional level of selection present in the panning experiments is likely to involve in vivo folding and assembly, as there was a rough correlation between recovery levels in the phage-panning experiments and protein solubility. The finding that loop insertions of 60-80 amino acids have minimal effects on SH2 domain stability suggests that the free energy cost of inserting long loops may be considerably less than polymer theory estimates based on the entropic cost of loop closure, and, hence, that loop insertion may have provided an evolutionary route to multidomain protein structures.