Rearrangements of the NFKB2 gene are associated with lymphoid malignancies, but the functional significance of these alterations is not known. Here we characterize structurally and functionally a rearranged NFKB2 gene identified at the T cell lymphoma line, HUT78. The rearrangement has truncated NFKB2 sequences within the 3' ankyrin domain, leading to the production of truncated mRNA species and proteins as detected by Northern blot and immunoprecipitation analysis, respectively. Cloning and sequencing of the corresponding cDNAs indicates that, via alternative splicing, the rearranged gene codes for two proteins of 84 and 85 kD (p84/85) which retain the DNA-binding rel domain and the first five ankyrin repeats, but have lost their carboxy-terminus including the seventh ankyrin repeat. Immunofluorescence and immunoprecipitation analysis of HUT78 cells indicate that p84/85 are abnormally located in the nucleus in an unprocessed form, suggesting that these proteins can escape the cytoplasmic retention typical of the normal NFKB2 p100 protein before it is processed into p52. Electrophoretic mobility shift assays performed on HUT78 nuclear extracts indicate that the abnormal NFKB2 proteins bind kappa B sites specifically and alter the composition of NF-kappa B complexes in HUT78 cells. Transient co-transfection assays involving NFKB2 expression vectors and kappa B-driven reporter plasmids indicate that NFKB2 p85 has lost the transcriptional repressor functions typical of normal NFKB2 p52. These data indicate that the NFKB2 gene rearrangement detected in HUT78 cells leads to the production of abnormal NFKB2 proteins capable of altering the function of the NF-kappa B transcription system. Since analogous rearrangements are found in lymphoid malignancies, these findings further support a role of NFKB2 alterations in tumorigenesis.