The AP-1 transcriptional activating complex, made up of Jun and Fos proteins, is involved in controlling many cellular processes such as cell proliferation, differentiation and transformation. We have previously characterized a dominant-negative mutant of c-Jun called TAM-67 which forms dimers with c-Jun and c-Fos, and binds DNA as a homodimer or heterodimer with c-Jun or c-Fos. This dominant-negative mutant is a potent inhibitor of AP-1 mediated transactivation, as well as c-jun/ras and TPA/ras-induced transformation. The present report describes experiments designed to elucidate the exact molecular mechanism of this dominant-negative inhibitor. The DNA binding kinetics of both TAM-67:TAM-67 homodimers as well as TAM-67:Fos heterodimers were studied and compared to those of c-Jun and other transactivation-deficient mutants of c-Jun. These studies demonstrated that the TAM-67 proteins have similar DNA binding kinetics to c-Jun and other Jun mutant proteins. Thus, the deletion of the amino-terminal end of the Jun protein does not significantly alter the protein's affinity for DNA. In addition, to determine whether TAM-67 functions through the formation of homodimers, or through interactions with endogenous c-Jun or c-Fos, we constructed a pair of chimeric proteins made by replacing the leucine zipper of TAM-67 with the leucine zippers of GCN4 and c-Fos. These chimeric proteins, termed TAM/GCN4 and TAM/Fos, were then tested for their ability to bind DNA, inhibit c-Jun-induced transactivation, and inhibit TPA/ras-mediated transformation. The results of these studies show that while both chimeric proteins bind equally well to DNA, only the TAM/Fos protein, and not the TAM/GCN4 protein, inhibits AP-1-induced transactivation and TPA/ras-induced transformation. When compared to the TAM-67 protein, the TAM/Fos protein is an equally potent inhibitor of transactivation and transformation. These results suggest that TAM-67 inhibits AP-1-mediated processes through a 'quenching' mechanism by inhibiting the function of endogenous Jun and/or Fos proteins. The implications of these mechanistic findings on the development of potent inhibitors of signal transduction pathways are discussed.