The mutation causing myotonic dystrophy (DM) has been identified as a CTG expansion in the 3'-untranslated region (3'-UTR) of the DM protein kinase gene ( DMPK ), but the mechanism(s) of pathogenesis remain unknown. Studies using DM patient materials have often produced confusing results. Therefore, to study the effects of the DM mutation in a controlled environment, we have established a cell culture model system using C2C12 mouse myoblasts. By expressing chimeric reporter constructs containing a reporter gene fused to a human DMPK 3'-UTR, we identified both cis and trans effects that are mediated by the DM mutation. Our data show that a mutant DMPK 3'-UTR, with as few as 57 CTGs, had a negative cis effect on protein expression and resulted in the aggregation of reporter transcripts into discrete nuclear foci. We determined by deletion analysis that an expanded (CTG) (n) tract alone was sufficient to mediate these cis effects. Furthermore, in contrast to the normal DMPK 3'-UTR mRNA, a mutant DMPK 3'-UTR mRNA with (CUG)(200)selectively inhibited myogenic differentiation of C2C12 myoblasts. Genetic analysis and the Cre- loxP system were used to clearly demonstrate that the myoblast fusion defect could be rescued by eliminating the expression of the mutant DMPK 3'-UTR transcript. Characterization of spontaneous deletion events mapped the inhibitory effect to the (CTG) (n) expansion and/or the 3' end of the DMPK 3'-UTR. These results provide evidence that the DM mutation acts in cis to reduce protein production (consistent with DMPK haploinsufficiency) and in trans as a 'riboregulator' to inhibit myogenesis.