Hepatocyte nuclear factor (HNF)-1beta, a homeodomain-containing transcription factor, regulates gene expression in a dimerized form in pancreas, liver, and some other tissues. Recent genetic studies have identified two HNF-1beta mutations, R177X and A263fsinsGG, in subjects with a monogenic form of type 2 diabetes. Despite the defects being in the same gene, diverse severities of disease are observed in the affected subjects. To investigate the molecular mechanism by which mutations might cause various phenotypic features, wild type and mutant proteins were transiently expressed in insulin-producing (MIN6) and hepatic (HepG2) cells. Luciferase reporter assay showed that both mutations resulted in a marked reduction of transactivation activity. Because their dimerization activity was found to be intact by the yeast two-hybrid system, it was possible that they were dominant-negative to wild type activity. When co-expressed with wild type, both of the mutants significantly decreased wild type activity in HepG2 cells. In contrast, although A263fsinsGG functioned similarly in MIN6 cells, R177X failed to affect wild type activity in this cell line. Immunohistochemical analysis of the mutants suggests that this functional divergence might be generated by the modification of nuclear localization. These results suggest that HNF-1beta mutations may impair pancreatic beta-cell function by loss-of-function and dominant-negative mechanisms.