Alx3 is a paired class aristaless-like homeoprotein expressed during embryonic development. Transcriptional transactivation by aristaless-like proteins has been associated with cooperative dimerization upon binding to artificially generated DNA consensus sequences known as P3 sites, but natural target sites in genes regulated by Alx3 are unknown. We report the cloning of a cDNA encoding the rat homolog of Alx3, and we characterize the protein domains that are important for transactivation, dimerization, and binding to DNA. Two proline-rich domains located amino-terminal to the homeodomain (Pro1 and Pro2) are necessary for Alx3-dependent transactivation, whereas another one (Pro3) located in the carboxyl terminus is dispensable but contributes to enhance the magnitude of the response. We confirmed that transcriptional activity of Alx3 from a P3 site correlates with cooperative dimerization upon binding to DNA. However, Alx3 was found to bind selectively to non-P3-related TAAT-containing sites present in the promoter of the somatostatin gene in a specific manner that depends on the nuclear protein environment. Cell-specific transactivation elicited by Alx3 from these sites could not be predicted from in vitro DNAbinding experiments by using recombinant Alx3. In addition, transactivation did not depend on cooperative dimerization upon binding to cognate somatostatin DNA sites. Our data indicate that the paradigm according to which Alx3 must act homodimerically via cooperative binding to P3-like sites is insufficient to explain the mechanism of action of this homeoprotein to regulate transcription of natural target genes. Instead, Alx3 undergoes restrictive or permissive interactions with nuclear proteins that determine its binding to and transactivation from TAAT target sites selected in a cellspecific manner.Homeodomain proteins are a large family of transcription factors that play prominent roles during embryonic development (1, 2). These proteins are characterized by the existence of a common DNA-binding structure, known as the homeodomain, that contains three ␣-helices spanning 60 amino acids.Comparison of amino acid sequences of known homeodomains from different species shows that residues in the first and third helices are highly conserved. Thus, the relative degree of sequence similarity in the DNA-binding domain defines different classes of homeodomain proteins that relate to protein homologs encoded by Drosophila melanogaster genes (3).Among the different classes of homeoproteins categorized so far, an important group with major roles in embryonic development is that of paired class proteins, characterized by the presence of a homeodomain homologous to the one encoded by the Drosophila paired gene (4). Additional conserved regions located outside the homeodomain define different subsets of paired class transcription factors.One of these subsets of paired class homeoproteins is characterized by the presence of a conserved domain located in the carboxyl-terminal region known as OAR or aristaless domain (4, 5...