Tau protein is a microtubule-associated protein that is almost exclusively expressed in the brain and is enriched in the axon. Determination of tau's sequence has revealed three to four tandem repeats that have been shown to constitute the microtubule binding site. In order to study the functional organization of tau, we prepared a series of truncated tau fragments using an Escherichia coli expression system. We assayed each fragment's activity in promoting growth of microtubules and in nucleating free microtubules. We found that tau's ability to nucleate microtubules requires the presence of additional sequence amino-terminal to that required for growth. We demonstrate that tau's carboxyl and amino termini differentially affect microtubule growth and nucleation. Finally, we show that in vitro microtubule bundle formation occurs when tubulin is assembled in the presence of an amino- and carboxyl-terminally truncated tau protein, whereas almost no bundling is observed in the presence of full-length tau or tau fragments that contain the amino terminus in addition to the repeat domain. We conclude that although the presence of the repeat domain promotes the growth of microtubules, the structural requirements for nucleation activity are more stringent. The differentiation between the growth promoting and nucleation activities on the structural level makes it possible for the two activities to be differentially regulated in vivo.