LIM homeodomain transcription factors regulate development in complex organisms. To characterize the molecular signals required for the nuclear localization of these proteins, we examined the Lhx3 factor. Lhx3 is essential for pituitary organogenesis and motor neuron specification. By using functional fluorescent derivatives, we demonstrate that Lhx3 is found in both the nucleoplasm and nuclear matrix. Three nuclear localization signals were mapped within the homeodomain, and one was located in the carboxyl terminus. The homeodomain also serves as the nuclear matrix targeting sequence. No individual signal is alone required for nuclear localization of Lhx3; the signals work in combinatorial fashion. Specific combinations of these signals transferred nuclear localization to cytoplasmic proteins. Mutation of nuclear localization signals within the homeodomain inhibited Lhx3 transcriptional function. By contrast, mutation of the carboxyl-terminal signal activated Lhx3, indicating that this region is critical to transcriptional activity and may be a target of regulatory pathways. The pattern of conservation of the nuclear localization and nuclear matrix targeting signals suggests that the LIM homeodomain factors use similar mechanisms for subcellular localization. Furthermore, upon nuclear entry, association of Lhx3 with the nuclear matrix may contribute to LIM homeodomain factor interaction with other classes of transcription factors.