In order to analyse whether a C-terminal polybasic sequence represents a nuclear localization signal (NLS) we obtained several truncated and mutant forms of protein of regerating liver (PRL)-3 and evaluated their subcellular localization as compared to the wild-type form. Our results invalidate the hypothesis that this is an NLS. We also analysed the influence of the C- and N-terminal residues on the phosphatase activity of PRL-3. Our results provide in vitro evidence that the C-terminal CAAX motif, besides directing the protein farnesylation, plays an additional regulatory role by inhibiting the catalytic efficiency of PRL-3. Taking into account the results we obtained, as well as reported data, we propose a hypothetical molecular mechanism for the nucleocytoplasmic localization and transfer of PRL-3.