Cellular retinoic acid-binding protein II (CRABP-II) is an intracellular lipid-binding protein that associates with retinoic acid with a subnanomolar affinity. We previously showed that CRABP-II enhances the transcriptional activity of the nuclear receptor with which it shares a common ligand, namely, the retinoic acid receptor (RAR), and we suggested that it may act by delivering retinoic acid to this receptor. Here, the mechanisms underlying the effects of CRABP-II on the transcriptional activity of RAR and the functional consequences of these effects were studied. We show that CRABP-II, a predominantly cytosolic protein, massively undergoes nuclear localization upon binding of retinoic acid; that it interacts with RAR in a ligand-dependent fashion; and that, in the presence of retinoic acid, the CRABP-II-RAR complex is a short-lived intermediate. The data establish that potentiation of the transcriptional activity of RAR stems directly from the ability of CRABP-II to channel retinoic acid to the receptor. We demonstrate further that overexpression of CRABP-II in MCF-7 mammary carcinoma cells dramatically enhances their sensitivity to retinoic acid-induced growth inhibition. Conversely, diminished expression of CRABP-II renders these cells retinoic acid resistant. Taken together, the data unequivocally establish the function of CRABP-II in modulating the RAR-mediated biological activities of retinoic acid.