Myotonic dystrophy (DM) is associated with expansion of CTG repeats in the 3'-untranslated region of the myotonin protein kinase (DMPK) gene. The molecular mechanism whereby expansion of the (CUG)n repeats in the 3'-untranslated region of DMPK gene induces DM is unknown. We previously isolated a protein with specific binding to CUG repeat sequences (CUG-BP/hNab50) that possibly plays a role in mRNA processing and/or transport. Here we present evidence that the phosphorylation status and intracellular distribution of the RNA CUG-binding protein, identical to hNab50 protein (CUG-BP/hNab50), are altered in homozygous DM patient and that CUG-BP/hNab50 is a substrate for DMPK both in vivo and in vitro. Data from two biological systems with reduced levels of DMPK, homozygous DM patient and DMPK knockout mice, show that DMPK regulates both phosphorylation and intracellular localization of the CUG-BP/hNab50 protein. Decreased levels of DMPK observed in DM patients and DMPK knockout mice led to the elevation of the hypophosphorylated form of CUG-BP/hNab50. Nuclear concentration of the hypophosphorylated CUG-BP/hNab50 isoform is increased in DMPK knockout mice and in homozygous DM patient. DMPK also interacts with and phosphorylates CUG-BP/hNab50 protein in vitro. DMPK-mediated phosphorylation of CUG-BP/hNab50 results in dramatic reduction of the CUG-BP2, hypophosphorylated isoform, accumulation of which was observed in the nuclei of DMPK knockout mice. These data suggest a feedback mechanism whereby decreased levels of DMPK could alter phosphorylation status of CUG-BP/hNab50, thus facilitating nuclear localization of CUG-BP/hNab50. Our results suggest that DM pathophysiology could be, in part, a result of sequestration of CUG-BP/hNab50 and, in part, of lowered DMPK levels, which, in turn, affect processing and transport of specific subclass of mRNAs.