The development of experimental methods for genome scale analysis of molecular interaction networks has made possible new approaches to inferring protein function. This paper describes a method of assigning functions based on a probabilistic analysis of graph neighborhoods in a protein-protein interaction network. The method exploits the fact that graph neighbors are more likely to share functions than nodes which are not neighbors. A binomial model of local neighbor function labeling probability is combined with a Markov random field propagation algorithm to assign function probabilities for proteins in the network.