The majority of thyroid carcinomas maintain the expression of the cell growth suppressor p27, an inhibitor of cyclin-dependent kinase-2 (Cdk2). However, we find that 80% of p27-expressing tumors show an uncommon cytoplasmic localization of p27 protein, associated with high Cdk2 activity. To reproduce such a situation, a mutant p27 devoid of its COOH-terminal nuclear-localization signal was generated (p27-NLS). p27-NLS accumulates in the cytoplasm and fails to induce growth arrest in 2 different cell lines, indicating that cytoplasm-residing p27 is inactive as a growth inhibitor, presumably because it does not interact with nuclear Cdk2. Overexpression of cyclin D3 may account in part for p27 cytoplasmic localization. In thyroid tumors and cell lines, cyclin D3 expression was associated with cytoplasmic localization of p27. Moreover, expression of cyclin D3 in thyroid carcinoma cells induced cytoplasmic retention of cotransfected p27 and rescued p27-imposed growth arrest. Endogenous p27 also localized prevalently to the cytoplasm in normal thyrocytes engineered to stably overexpress cyclin D3 (PC-D3 cells). In these cells, cyclin D3 induced the formation of cytoplasmic p27-cyclin D3-Cdk complexes, which titrated p27 away from intranuclear complexes that contain cyclins A-E and Cdk2. Our results demonstrate a novel mechanism that may contribute to overcoming the p27 inhibitory threshold in transformed thyroid cells.