The Krüppel-like zinc finger protein Gli-similar 3 (Glis3) plays a critical role in pancreatic development and has been implicated in a syndrome with neonatal diabetes and hypothyroidism (NDH). In this study, we examine three steps critical in the mechanism of the transcriptional regulation by Glis3: its translocation to the nucleus, DNA binding and transcriptional activity. We demonstrate that the putative bipartite nuclear localization signal is not required, but the tetrahedral configuration of the fourth zinc finger is essential for the nuclear localization of Glis3. We identify (G/C)TGGGGGGT(A/C) as the consensus sequence of the optimal, high-affinity Glis3 DNA-binding site (Glis-BS). All five zinc finger motifs are critical for efficient binding of Glis3 to Glis-BS. We show that Glis3 functions as a potent inducer of (Glis-BS)-dependent transcription and contains a transactivation function at its C-terminus. A mutation in Glis3 observed in NDH1 patients results in a frameshift mutation and a C-terminal truncated Glis3. We demonstrate that this truncation does not effect the nuclear localization but results in the loss of Glis3 transactivating activity. The loss in Glis3 transactivating function may be responsible for the abnormalities observed in NDH1. © 2008 The Author(s).