Protein iodination in the thyroid is largely confined to the surface of the epithelium. Intracellular iodine binding is insignificant. We have tested our hypothesis that the key mechanism in the control of intracellular iodination is the control of the intracellular availability of H2O2. The sites of iodination were identified by locating bound radioiodine in electron microscopic autoradiographs, produced from porcine thyroid epithelium grown on filter in Transwell bicameral culture chambers. Autoradiographs obtained after standard incubations with 125I for 15 min to 3 h were all characterized by concentrations of autoradiographic grains along the external surface of the plasma membrane and very few grains over the cytoplasm. The presence of 10 microM H2O2 in the incubation medium resulted in a drastically changed labeling pattern now showing a dissemination of grains over the entire cytoplasm. Epithelia with elevated GSH peroxidase activity produced autoradiographs showing the same restriction of grains to the cell surface as controls; this pattern was the same in the absence and presence of H2O2 (up to 10 microM). Cultures with subnormal GSH peroxidase activity presented cytoplasmic labeling both in the absence and presence of H2O2. In conclusion, iodine binding in filter-cultured thyroid epithelium under normal conditions is an extracellular process located at the cell surface. When H2O2 is available intracellularly, iodination takes place in the cytoplasm, evidently catalyzed by intracellular thyroperoxidase. Normally, this iodination is prevented by cytosolic GSH peroxidase that effectively degrades H2O2 and thus controls intracellular iodination. The observations should be applicable to the thyroid in vivo.