Alpha interferon (IFN-alpha)-induced transcriptional activation requires the induction of a complex of DNA-binding proteins, including tyrosine-phosphorylated Stat1 and Stat2, and of p48, a protein which is not phosphorylated on tyrosine and which comes from a separate family of DNA-binding proteins. The isolation and characterization of U6A cells, which lack Stat2, have allowed the introduction of normal and mutant forms of Stat2 so that various functions of the Stat2 protein can be examined. As reported earlier, Stat1, which is the second target of tyrosine phosphorylation in IFN-alpha-treated cells, is not phosphorylated in the absence of Stat2. We show that all mutations that block Stat2 phosphorylation also block Stat1 phosphorylation. These include not only the mutations of Y-690 and SH2 domain residues that are involved in tyrosine phosphorylation but also short deletions at the amino terminus of the protein. Two mutants of Stat2 that are not phosphorylated on tyrosine can act as dominant negative proteins in suppressing wild-type Stat2 phosphorylation, most likely by competition at the receptor-kinase interaction site(s). We also show that the COOH-terminal 50 amino acids are required for transcriptional activation in response to IFN-alpha. Mutants lacking these amino acids can be phosphorylated, form IFN-stimulated gene factor 3, and translocate to the nucleus but cannot stimulate IFN-alpha-dependent transcription. Seven acidic residues are present in the deleted COOH-terminal residues, but 24 acidic residues still remain in the 100 carboxy-terminal amino acids after deletion. Thus, transcriptional activation is unlikely to depend on acidic amino acids alone.