The pleiotropic effects of retinoic acid (RA) in mammalian cells are mediated by two classes of proteins: the retinoic acid receptors (RAR) and cellular retinoic acid-binding proteins (CRABP-I and CRABP-II), Here we show that expression of CRABP-II, but not CRABP-I, markedly enhanced RAR-mediated transcriptional activation of a reporter gene in COS-7 cells. The equilibrium dissociation constants of complexes of CRABP-I or CRABP-II with RA were found to differ by 2-fold. It is thus unlikely that the distinct effects of the two proteins on transactivation stem from differential ligand-binding affinities. The mechanisms by which RA transfers from the CRABPs to RAR were thus investigated directly. The rate constant for movement of RA from CRABP-II, but not from CRABP-I, to RAR strongly depended on the concentration of the acceptor. The data suggest that transfer of RA from CRABP-I to RAR involves dissociation of the ligand from the binding protein, followed by association with the receptor. In contrast, movement of RA from CRABP-II to the receptor is facilitated by a mechanism that involves direct interactions between CRABP-II and RAR, These findings reveal a striking functional difference between CRABP-I and CRABP-II, and point at a novel mechanism by which the transcriptional activity of RA can be regulated by CRABP-II.