Otx3/Dmbx1 is a member of paired class homeodomain transcription factors. In this study, we found that Otx3/Dmbx1 represses the Otx2-mediated transactivation by forming heterodimer with Otx2 on the P3C (TAATCCGATTA) sequence in vitro. The 156 amino acid region (residues 1-156) of Otx3/Dmbx1 is required for its repressor activity, and interacts directly with Otx2. Co-localization of Otx3/Dmbx1 and Otx2 in brain sections was confirmed by in situ hybridization. These data suggest that Otx3/Dmbx1 represses Otx2-mediated transcription in the developing brain. We also identified the consensus binding sequence [TAATCCGATTA and TAATCC(N2-4)TAATCC] of Otx3/Dmbx1.