The murine Dlx3 protein is a putative transcriptional activator that has been implicated during development and differentiation of epithelial tissue. Dlx3 contains a homeodomain and mutational analysis has revealed two regions, one N-terminal and one C-terminal to the homeodomain, that act as transcriptional activators in a yeast one-hybrid assay. In addition to transactivation, data are presented to demonstrate specific DNA binding and an association between Dlx3 and the Msx1 protein in vitro. Immunohistochemical analysis confirmed coexpression of Dlx3 and Msx1 proteins in the differentiated layers of murine epidermal tissues. Transcription factor function requires nuclear localization. In this study, the intracellular localization of the green fluorescent protein fused to Dlx3 was examined in keratinocytes induced to differentiate by calcium and is shown to localize to the nucleus. A bipartite nuclear localization signal (NLS) was identified by mutational analysis and shown to be sufficient for nuclear localization. This was demonstrated by insertion of the Dlx3 bipartite NLS sequence into a cytoplasmic fusion protein, GFP-keratin 14, which functionally redirected GFP-keratin 14 expression to the nucleus. Further analysis of Dlx3 NLS mutants revealed that the Dlx3 NLS sequences are required for specific DNA binding, transactivation potential and interactions with the Msx1 protein.