We have employed a chimeric receptor system in which we cotransfected yeast GAL4 DNA-binding domain/retinoid X receptor beta ligand-binding domain chimeric receptor (GAL4RXR), thyroid hormone receptor-beta (TRbeta), and upstream activating sequence-reporter plasmids into CV-1 cells to study repression, derepression, and transcriptional activation. In the absence of T3, unliganded TR repressed transcription to 20% of basal level, and in the presence of T3, liganded TRbeta derepressed transcription to basal level. Using this system and a battery of TRbeta mutants, we found that TRbeta/RXR heterodimer formation is necessary and sufficient for basal repression and derepression in this system. Additionally, an AF-2 domain mutant (E457A) mediated basal repression but not derepression, suggesting that interaction with a putative coactivator at this site may be critical for derepression. Interestingly, a mutant containing only the TRbeta ligand binding domain (LBD) not only mediated derepression, but also stimulated transcriptional activation 10-fold higher than basal level. Studies using deletion and domain swap mutants localized an inhibitory region to the TRbeta DNA-binding domain. Titration studies further suggested that allosteric changes promoting interaction with coactivators may account for enhanced transcriptional activity by LBD. In summary, our findings suggest that TR heterodimer formation with RXR is important for repression and derepression, and coactivator interaction with the AF-2 domain may be needed for derepression in this chimeric system. Additionally, there may be an inhibitory region in the DNA-binding domain, which reduces TR interaction with coactivators, and prevents full-length wild-type TRbeta from achieving transcriptional activation above basal level in this chimeric receptor system.