MBD2 and MBD3 are two proteins that contain methyl-CpG binding domains and have a transcriptional repression function. Both proteins are components of a large CpG-methylated DNA binding complex named MeCP1, which consists of the nucleosome remodeling and histone deacetylase complex Mi2-NuRD and MBD2. MBD3L2 (methyl-CpG-binding protein 3-like 2) is a protein with substantial homology to MBD2 and MBD3, but it lacks the methyl-CpG-binding domain. Unlike MBD3L1, which is specifically expressed in haploid male germ cells, MBD3L2 expression is more widespread. MBD3L2 interacts with MBD3 in vitro and in vivo, co-localizes with MBD3 but not MBD2, and does not localize to methyl-CpG-rich regions in the nucleus. In glutathione S-transferase pull-down assays, MBD3L2 is found associated with several known components of the Mi2-NuRD complex, including HDAC1, HDAC2, MTA1, MBD3, p66, RbAp46, and RbAp48. Gel shift experiments with nuclear extracts and a CpG-methylated DNA probe indicate that recombinant MBD3L2 can displace a form of the MeCP1 complex from methylated DNA. MBD3L2 acts as a transcriptional repressor when tethered to a GAL4-DNA binding domain. Repression by GAL4-MBD3L2 is relieved by MBD2 and vice versa, and repression by MBD2 from a methylated promoter is relieved by MBD3L2. The data are consistent with a role of MBD3L2 as a transcriptional modulator that can interchange with MBD2 as an MBD3-interacting component of the NuRD complex. Thus, MBD3L2 has the potential to recruit the MeCP1 complex away from methylated DNA and reactivate transcription.