The type III transmembrane adaptor protein linker for activation of T cells (LAT) is essential for membrane recruitment of signalling molecules following TCR activation. Here we show that although LAT deleted in the transmembrane domain is completely soluble, it can be tyrosine phosphorylated after anti-CD3 stimulation or pervanadate treatment. Overexpression of this deletion mutant in transiently transfected Jurkat TAg cells inhibits transcriptional activation of nuclear factor of activated T cells (NF-AT)/AP-1 reporter construct in a concentration-dependent manner. Furthermore, by selection of transiently transfected cells, a clear reduction of TCR-induced CD69 expression was observed in cells expressing the mutant. These dominant negative effects seemed to be dependent both on the ability of the membrane deletion mutant to reduce phosphorylation of endogenous LAT and to reduce interaction of endogenous LAT with PLC-gamma1 and Grb2. Consistent with this, the redistribution of PLC-gamma1 and Grb2 to glycolipid-enriched microdomains, called lipid rafts, after stimulation was inhibited when the soluble form of LAT was overexpressed. We suggest that the dominant negative effect is caused by the ability of the mutant to sequester signalling molecules in cytosol and thereby inhibit redistribution of signalling molecules to lipid rafts upon T-cell activation.