Recent studies have shown that mutations in the hepatocyte nuclear factor (HNF)-4alpha gene give rise to maturity-onset diabetes of the young, type 1 (MODY1). HNF-4, an orphan member of the nuclear receptor superfamily, contains a DNA-binding domain (DBD) and a putative ligand-binding domain (LBD) that can act independently of each other. The first MODY1 mutation identified creates a stop codon at amino acid 268 in the LBD of HNF-4 (Q268X) that leaves the DBD intact, suggesting that the mutant protein may retain some of the properties of the wild-type protein. To determine the functional properties of this mutant, we constructed HNF4.Q268X and tested it in vitro and in vivo for DNA binding, protein dimerization, and transactivation activity. Results of an electrophoretic mobility shift assay showed that HNF4.Q268X neither binds DNA alone nor binds it as a dimer with wild-type HNF-4 (HNF4.wt). In contrast, a co-immunoprecipitation assay showed that HNF4.Q268X is capable of dimerizing in solution with HNF4.wt. Transient transfection assays, however, indicated that HNF4.Q268X does not affect transactivation by HNF4.wt in vivo, supporting the argument against a dominant negative effect. Additional results suggest that the lack of a dominant negative effect could be due to a striking differential subcellular localization of the HNF4.Q268X protein: HNF4.Q268X could be extracted from transfected cells only when treated with SDS. Taken together, our results suggest that the MODY1 phenotype is due to a loss of functional HNF-4 protein that is aggravated in tissues that express relatively low amounts of HNF-4, such as pancreas.