Nuclear changes, including internucleosomal DNA fragmentation, are classical manifestations of apoptosis for which the biochemical mechanisms have not been fully elucidated, particularly in neuronal cells. We have cloned the rat DNA fragmentation factor 35/inhibitor of caspase-activated DNase (short form) (DFF35/ICAD(S)) and found it to be the predominant form of ICAD present in rodent brain cells as well as in many other types of cells. DFF35/ICAD(S) forms a functional complex with DFF40/caspase-activated DNase (CAD) in the nucleus, and when its caspase-resistant mutant is over-expressed, it inhibits the nuclease activity, internucleosomal DNA fragmentation, and nuclear fragmentation but not the shrinkage and condensation of the nucleus, in neuron-differentiated PC12 cells in response to apoptosis inducers. DFF40/CAD is found to be localized mainly in the nucleus, and during neuronal apoptosis, there is no evidence of further nuclear translocation of this molecule. It is further suggested that inactivation of DFF40/CAD-bound DFF35 and subsequent activation of DFF40/CAD during apoptosis of neuronal cells may not occur in the cytosol but rather in the nucleus through a novel mechanism that requires nuclear translocation of caspases. These results establish that DFF35/ICAD(S) is the endogenous inhibitor of DFF40/CAD and caspase-dependent apoptotic DNA fragmentation in neurons.