The Ikaros gene, an essential regulator of lymphocyte differentiation, encodes, by means of differential splicing, protein isoforms with a distinct number of Kruppel‐type zinc fingers organized in two domains. Deletion of the N‐terminal zinc finger domain responsible for the sequence‐specific DNA binding of the Ikaros proteins results in an early and complete arrest in lymphocyte development in homozygous mutant mice. In sharp contrast, heterozygotes reliably develop T cell leukemias and lymphomas. Here we show that the C‐terminal zinc finger domain present in all of the Ikaros wild‐type and mutant isoforms is responsible for their stable interactions off DNA and plays a pivotal role in determining their overall activity. Mutations in the C‐terminal zinc fingers which ablate Ikaros protein interactions have a dramatic effect on the ability of these proteins to bind DNA and activate transcription. Therefore, interactions between Ikaros isoforms with an intact DNA binding domain are essential for their function. In contrast, interactions between isoforms with and without a DNA binding domain result in Ikaros complexes that do not bind DNA and, as a consequence, cannot activate transcription. Dominant‐negative Ikaros isoforms are generated in smaller amounts by the wild‐type Ikaros gene but are also produced exclusively by the N‐terminally deleted Ikaros locus. Given these data, we propose that interactions between Ikaros isoforms are essential for normal progression through the lymphoid pathways. Mutations in the Ikaros gene that prevent Ikaros protein interactions or which change the relative ratio of DNA to non‐DNA binding isoforms have profound effects in both lymphoid specification and homeostasis.