IkappaB-zeta is an inducible nuclear protein that interacts with nuclear factor-kappaB (NF-kappaB) via its carboxyl-terminal ankyrin-repeats. Previous studies using an NF-kappaB reporter have shown that IkappaB-zeta inhibits the activity of NF-kappaB. In the present study, we dissected the amino-terminal region of IkappaB-zeta, which shows no homology to any other proteins. Indirect immunofluorescence studies demonstrated the presence of a bipartite nuclear localization signal spanning amino acids 163-178. Using GAL4 fusion proteins, we found that internal fragments containing amino acids 329-402 possessed intrinsic transcriptional activation activity. Interestingly, the activity was not detected in GAL4 fusion proteins of the full-length IkappaB-zeta. On the other hand, the GAL4-dependent transcriptional activity was generated by co-expression of the GAL4-NF-kappaB p50 subunit fusion protein and the full-length IkappaB-zeta, neither of which exhibited the activity on their own. A new splicing variant, IkappaB-zeta(D), with a deletion of amino acids 236-429, was found to lack transactivation activity. Forced expression of IkappaB-zeta, but not IkappaB-zeta(D), augmented interleukin-6 production, indicating the functional significance of the transactivation activity. In contrast, tumor necrosis factor-alpha production was inhibited by expression of IkappaB-zeta, highlighting the dual functions of this molecule. These results indicate that IkappaB-zeta harbors latent transcriptional activation activity, and that the activity is expressed upon interaction with the NF-kappaB p50 subunit. In addition to the inhibitory activity on NF-kappaB-mediated transcription, the transcriptional activation activity of IkappaB-zeta should be crucial for the regulation of inflammation.