Human T-cell leukemia virus (HTLV) regulatory protein, Rex, functions to increase the expression of the viral structural and enzymatic gene products. The phosphorylation of two serine residues (S151 and S153) at the C terminus is important for the function of HTLV-2 Rex (Rex-2). The Rex-2 phosphomimetic double mutant (S151D, S153D) is locked in a functionally active conformation. Since rex and tax genes overlap, Rex S151D and S153D mutants were found to alter the Tax oncoprotein coding sequence and transactivation activities. Therefore, additional Rex-2 mutants including P152D, A157D, S151Term, and S158Term were generated and characterized ("Term" indicates termination codon). All Rex-2 mutants and wild-type (wt) Rex-2 localized predominantly to the nucleus/nucleolus, but in contrast to the detection of phosphorylated and unphosphorylated forms of wt Rex-2 (p26 and p24), mutant proteins were detected as a single phosphoprotein species. We found that Rex P152D, A157D, and S158Term mutants are more functionally active than wt Rex-2 and that the Rex-2 C terminus and its specific phosphorylation state are required for stability and optimal expression. In the context of the provirus, the more active Rex mutants (A157D or S158Term) promoted increased viral protein production, increased viral infectious spread, and enhanced HTLV-2-mediated cellular proliferation. Moreover, these Rex mutant viruses replicated and persisted in inoculated rabbits despite higher antiviral antibody responses. Thus, we identified in Rex-2 a novel C-terminal inhibitory domain that regulates functional activity and is positively regulated through phosphorylation. The ability of this domain to modulate viral replication likely plays a key role in the infectious spread of the virus and in virus-induced cellular proliferation.