Drosophila Muscleblind (Mbl) proteins control terminal muscle and neural differentiation, but their molecular function has not been experimentally addressed. Such an analysis is relevant as the human Muscleblind-like homologs (MBNL1-3) are implicated in the pathogenesis of the inherited muscular developmental and degenerative disease myotonic dystrophy. The Drosophila muscleblind gene expresses four protein coding splice forms (mblA to mblD) that are differentially expressed during the Drosophila life cycle, and which vary markedly in their ability to rescue the embryonic lethal phenotype of muscleblind mutant flies. Analysis of muscleblind mutant embryos reveals misregulated alternative splicing of the transcripts encoding Z-band component alpha-Actinin, which can be replicated in human cells expressing a Drosophilaalpha-actinin minigene and epitope-tagged Muscleblind isoforms. MblC appreciably altered alpha-actinin splicing in this assay, whereas other isoforms had only a marginal or no effect, demonstrating functional specialization among Muscleblind proteins. To further analyze the molecular basis of these differences, we studied the subcellular localization of Muscleblind isoforms. Consistent with the splicing assay results, MblB and MblC were enriched in the nucleus while MblA was predominantly cytoplasmic. In myotonic dystrophy, transcripts bearing expanded non-coding CUG or CCUG repeats interfere with the function of human MBNL proteins. Co-expression of CUG repeat RNA with the alpha-actinin minigene altered splicing compared with that seen in muscleblind mutant embryos, indicating that CUG repeat expansion RNA also interferes with Drosophila muscleblind function. Moreover MblA, B, and C co-localize with CUG repeat RNA in nuclear foci in cell culture. Our observations indicate that Muscleblind isoforms perform different functions in vivo, that MblC controls muscleblind-dependent alternative splicing events, and establish the functional conservation between Muscleblind and MBNL proteins both over a physiological target (alpha-actinin) and a pathogenic one (CUG repeats).