The biological activity of the transcription factor NF-kappaB is mainly controlled by the IkappaB proteins IkappaBalpha and IkappaBbeta, which restrict NF-kappaB in the cytoplasm and enter the nucleus where they terminate NF-kappaB-dependent transcription. In this paper we describe the cloning and functional characterization of mouse IkappaBepsilon. Mouse IkappaBepsilon contains 6 ankyrin repeats required for its interaction with the Rel proteins and is expressed in different cell types where we found that it is up-regulated by NF-kappaB inducers, as is the case for IkappaBalpha and human IkappaBepsilon. IkappaBepsilon functions as a bona fide IkappaB protein by restricting Rel proteins in the cytoplasm and inhibiting their in vitro DNA binding activity. Surprisingly, IkappaBepsilon did not inhibit transcription of genes regulated by the p50/p65 heterodimer efficiently, such as the human interferon-beta gene. However, IkappaBepsilon was a strong inhibitor of interleukin-8 expression, a gene known to be regulated by p65 homodimers. In addition, IkappaBepsilon appears to function predominantly in the cytoplasm to sequester p65 homodimers, in contrast with the other two members of the family, IkappaBalpha and IkappaBbeta, which also function in the nucleus to terminate NF-kappaB-dependent transcriptional activation.