The homeodomain-containing Msx3 gene, the newest member of the Msx family, encodes two mRNAs, with an unknown relationship to each other. To elucidate how Msx3 gene generates the two transcripts, we cloned their corresponding cDNAs from an E10.5 mouse embryo cDNA library. The alignment of sequences of the two Msx3-specific cDNAs with the corresponding regions of the genomic DNA revealed that read-through of the sequences preceding a cryptic splice donor site in the first intron of Max3 gene generated the longer transcript. The longer Msx3 mRNA (Msx3-l) contains 66 nucleotides spliced in frame that would encode a protein with 22 additional amino acids. These extra 22 amino acids are inserted between the residues 72 and 73, exactly 14 amino acids upstream of the homeodomain of the smaller Msx3 protein. In situ hybridization and competitive RT-PCR experiments revealed that both Msx3-s and Msx3-l mRNAs elicited similar spatio-temporal patterns of expression in the developing embryo, with maximal expression of both mRNAs occurring in the embryos between 8.5 and 12.5 days post-coitus. We found that while Msx3-s down-regulated Msx1 promoter in transfected C2C12 cells, co-expression of Msx3-l alone did not affect the activity of the Msx1 promoter. In contrast, a concomitant expression of Msx3-s and Msx3-l in the transfected C2C12 cells neutralized the repressive effect of Msx3-s on the Msx1 promoter. In transient expression assays, the repressive action of Msx3-s on Msx1 promoter could also be reversed by co-expression of exogenous Sp1. Our data indicate that the potential interactions among the protein products encoded by the alternately spliced Msx3 mRNAs and the putative constituents of transcriptional co-activators and co-repressors may have functional consequences in vivo.