P19 embryonal carcinoma (EC) cells differentiate when treated with retinoic acid (RA). The P19 EC-derived mutant cell line RAC65 is resistant to the differentiation-inducing activity of RA. We show that these cells express a truncated retinoic acid receptor alpha(mRAR alpha-RAC65), probably due to the integration of a transposon-like element in the RAR alpha gene. This receptor lacks 71 C-terminal amino acids and terminates in the ligand-binding domain. In CAT assays in RAC65 cells, mRAR alpha-RAC65 fails to trans-activate the RAR beta promoter, which contains a RA-response element. In wild-type P19 EC cells mRAR alpha-RAC65 functions as a dominant-negative repressor of RA-induced RAR beta activation. Gel retardation assays demonstrate that mRAR alpha-RAC65 is still able to bind to the RA-response element of the RAR beta promoter, indicating that competition with functional RARs for the same binding site leads to the observed dominant-negative effect. In addition, in two RAC65 clones in which wild-type hRAR alpha was stably transfected RA-sensitivity was restored and in one RAR beta expression could be induced by RA. Taken together, these data show that the primary cause of RA-resistance of RAC65 cells is the expression of a defective RAR alpha, which prevents the trans-activation of RA-responsive genes and results in a loss of the ability to differentiate.