The formation of a gradient of nuclear Dorsal protein in the early Drosophila embryo is the last step in a maternally encoded dorsal-ventral signal transduction pathway. This gradient is formed in response to a ventral signal, which leads to the dissociation of cytoplasmic Dorsal from the I kappa B homolog Cactus. Free Dorsal is then targeted to the nucleus. Dorsal is a Rel-family transcription factor. Signal-dependent nuclear localization characterizes the regulation of Rel proteins. In order to identify regions of Dorsal that are essential for its homodimerization, nuclear targeting, and interaction with Cactus, we have performed an in vivo structure-function analysis. Our results show that all these functions are carried out by regions within the conserved Rel-homology region of Dorsal. The C-terminal divergent half of Dorsal is dispensable for its selective nuclear import. A basic stretch of 6 amino acids at the C terminus of the Rel-homology region is necessary for nuclear localization. This nuclear localization signal is not required for Cactus binding. Removal of the N-terminal 40 amino acids abolished the nuclear import of Dorsal, uncovering a potentially novel function for this highly conserved region.