Mitogen-activated protein kinases (MAPKs) play a vital role in cellular growth control, but far less is known about these signalling pathways in the context of embryonic development. Duration and magnitude of MAPK activation are crucial factors in cell fate decisions, and reflect a balance between the activities of upstream activators and specific MAPK phosphatases (MKPs). Here, we report the isolation and characterization of the murine Pyst3 gene, which encodes a cytosolic dual-specificity MKP. This enzyme selectively interacts with, and is catalytically activated by, the 'classical' extracellular signal-regulated kinases (ERKs) 1 and 2 and, to a lesser extent, the stress-activated MAPK p38alpha. These properties define the ability of this enzyme to dephosphorylate and inactivate ERK1/2 and p38alpha, but not JNK (c-Jun N-terminal kinase) in vivo. When expressed in mammalian cells, the Pyst3 protein is predominantly cytoplasmic. Furthermore, leptomycin B causes a complete redistribution of the protein to the nucleus, implicating a CRM (chromosomal region maintenance)1/exportin 1-dependent nuclear export signal in determining the subcellular localization of this enzyme. Finally, whole-mount in situ hybridization studies in mouse embryos reveal that the Pyst3 gene is expressed specifically in the placenta, developing liver and in migratory muscle cells. Our results suggest that this enzyme may have a critical role in regulating the activity of MAPK signalling during early development and organogenesis.