Proteolytic processing of the p105 precursor (NF-kappa B1) generates the p50 subunit of NF-kappa B. To address the function of p105 precursor, we have generated embryonic stem (ES) cells which lack the C-terminal inhibiting ankyrin-containing domain of p105 (I kappa B gamma) but contain a functional p50 by homologous recombination. Two forms of p50 were found in ES cells lacking p105. While one was a p50 molecule with the expected size of 415 amino acids, the other was an isoform of 358 amino acids generated by alternative splicing. This isoform lacked the C-terminal 62 amino acids of p50 including the putative nuclear localization signal (NLS), but included five unrelated amino acids. This p50 molecule lacking the NLS behaved similar to wild type p50. Importantly, the p50 isoform-RelA complex interacted efficiently with I kappa B alpha, implying that the NLS of p50 is not essential for these functions. Also, p50 isoform dimers were present in the nucleus. Loss of p105 and the augment of total p50 produced an increase in the nuclear kappa B-binding activity of p50-RelA and p50 dimers. In wild type ES cells, a significant proportion of total p50 is associated with p105. Therefore, the mutation introduced in NF-kappa B1 eliminates both the processing to generate p50 and the trapping of p50 by p105. In contrast to p50, only a small fraction of RelA is associated with p105. These findings indicate that p105 plays a unique role in controlling p50 dimer activity.