The REL gene is amplified in many human B-cell lymphomas and we have previously shown that expression of REL from a retroviral vector can malignantly transform chicken spleen cells in vitro. To identify REL protein functions necessary for malignant transformation, we have performed deletion analysis on REL sequences encoding residues of two C-terminal subdomains that are involved in transcriptional activation. We find that deletion of both C-terminal transactivation subdomains abolishes the ability of REL to transform chicken spleen cells in vitro. In contrast, deletion of either transactivation subdomain alone, which reduces the transactivation ability of REL, enhances the transforming activity of REL. Transforming REL mutants missing C-terminal sequences can also be selected at a low frequency in vitro. The REL transactivation domain can be functionally replaced in transformation assays by a portion of the VP16 transactivation domain that activates at a level similar to REL-transforming mutants. We also find that deletion of 29 C-terminal amino acids causes the subcellular localization of REL to change from cytoplasmic to nuclear in chicken embryo fibroblasts. In contrast, wild-type REL and all transforming REL mutants are located primarily in the cytoplasm of transformed spleen cells. Nevertheless, treatment of transformed spleen cells with leptomycin B causes wild-type REL and two REL mutants to relocalize to the nucleus, and nuclear extracts from these transformed cells contain REL DNA-binding activity. Taken together, these results suggest the following: (1) that REL must activate transcription to transform cells in vitro; (2) that a reduced level of transactivation enhances the oncogenicity of REL; (3) that REL shuttles from the cytoplasm to the nucleus in transformed chicken spleen cells; and (4) that mutations in REL, in addition to amplifications, could activate its oncogenicity in human lymphomas.