The biological activity of the transcription factor NF-kappa B is mainly controlled by the I kappa B proteins I kappa B alpha and I kappa B beta, which restrict NF-kappa B in the cytoplasm and enter the nucleus where they terminate NF-KB dependent transcription, In this paper we describe the cloning and functional characterization of mouse I kappa B epsilon. Mouse I kappa B epsilon contains 6 ankyrin repeats required for its interaction with the Rel proteins and is expressed in different cell types where we found that it is up-regulated by NF-kappa B inducers, as is the case for I kappa B alpha and human I kappa B epsilon. I kappa B epsilon functions as a bona fide I kappa B protein by restricting Rel proteins in the cytoplasm and inhibiting their in vitro DNA binding activity. Surprisingly, I kappa B epsilon did not inhibit transcription of genes regulated by the p50/p65 heterodimer efficiently, such as the human interferon-beta gene. However, I kappa B epsilon was a strong inhibitor of interleukin-8 expression, a gene known to be regulated by p65 homodimers. In addition, I kappa B epsilon appears to function predominantly in the cytoplasm to sequester p65 homodimers, in contrast with the other two members of the family, I kappa B alpha and I kappa B beta, which also function in the nucleus to terminate NF-kappa B-dependent transcriptional activation.