Human T-cell leukemia virus type I (HTLV-I) encodes a 40 kDa trans-acting protein, Tax, that regulates transcription of both the proviral and cellular genes, and can transform rat fibroblasts. To determine the functional importance of its trans-acting capacities in cell transformation, we have examined two representative pathways of transcriptional activation--HTLV-I long terminal repeat (LTR) mediated and NF-kappa B dependent--by mutational analysis of Tax. In contrast to a previous report, mutants lacking the ability to activate an NF-kappaB-dependent promoter failed to transform rat fibroblasts, whereas a mutation which abolishes the HTLV-I LTR-mediated trans-activation demonstrated a wild-type capacity for cell transformation. Stable expression of Tax competent for transformation caused enhanced DNA binding of NF-kappa B in rat fibroblasts. We also demonstrate that stable co-expression of the NFKB2 precursor, known as a member of the I kappa B proteins, with wild-type Tax blocked transformation as well as eliminated aberrant NF-kappaB activation by Tax without interference with the HTLV-I LTR-mediated trans-activation. Our results indicate that constitutive activation of NF-kappa B is essential for Tax-mediated transformation of rat fibroblasts.