The mammalian transcription factor AP-2 is a sequence-specific DNA-binding protein expressed in neural crest lineages and regulated by retinoic acid. Here we report a structure/function analysis of the DNA-binding and transcription activation properties of the AP-2 protein. DNA contact studies indicate that AP-2 binds as a dimer to a palindromic recognition sequence. Furthermore, cross-linking and immunoprecipitation data illustrate that AP-2 exists as a dimer even in the absence of DNA. Examination of cDNA mutants reveals that the sequences responsible for DNA binding are located in the carboxy-terminal half of the protein. In addition, a domain mediating dimerization forms an integral component of this DNA-binding structure. Expression of AP-2 in mammalian cells demonstrates that transcriptional activation requires an additional amino-terminal domain that contains an unusually high concentration of proline residues. This proline-rich activation domain also functions when attached to the heterologous DNA-binding region of the GAL4 protein. This study reveals that although AP-2 shares an underlying modular organization with other transcription factors, the regions of AP-2 involved in transcriptional activation and DNA binding/dimerization have novel sequence characteristics.