NF-kappa B is an inducible transcription factor comprised of a 50-kD (p50) and a 65-kD (p65) subunit. Induction of NF-kappa B activity, which is a critical event in many signal transduction pathways, involves release from a cytoplasmic inhibitory protein, I kappa B, followed by translocation of the active transcription factor complex into the nucleus. Earlier studies suggested that I kappa B targets the p65 subunit of NF-kappa B. However, we demonstrate by in vitro and in vivo methods that the recently cloned I kappa B/MAD-3 interacts with both the p50 and p65 subunits of NF-kappa B, as well as c-Rel. Furthermore, an alternatively spliced, dimerization-deficient transforming variant of p65 (p65 delta) interacts extremely weakly with I kappa B/MAD-3, suggesting that dimerization is important for interaction. We demonstrate that the conserved nuclear localization sequences (NLSs) of NF-kappa B and c-Rel are the targets for I kappa B/MAD-3 interaction. Indirect immunofluorescence experiments demonstrate that I kappa B/MAD-3 expression retains both p65 and p50 in the cytoplasm. Furthermore, and most important, a p65 that contains an SV40 large T antigen NLS in addition to its own NLS is no longer retained in the cytoplasm in the presence of I kappa B/MAD-3. We propose that I kappa B/MAD-3 masks the NLSs of NF-kappa B and c-Rel and that this constitutes the mechanism for cytoplasmic retention of these proteins.