MHC class II molecules bind antigenic peptides in the late endosomal/lysosomal MHC class II compartments (MIIC) before cell surface presentation. The class II modulatory molecules HLA-DM and HLA-DO mainly localize to the MIICs. Here we show that DM/DO complexes continuously recycle between the plasma membrane and the lysosomal MIICs. Like DMbeta and the class II-associated invariant chain, the DObeta cytoplasmic tail contains potential lysosomal targeting signals. The DObeta signals, however, are not essential for internalization of the DM/DO complex from the plasma membrane or targeting to the MIICs. Instead, the DObeta tail determines the distribution of both DM/DO and class II within the multivesicular MIIC by preferentially localizing them to the limiting membrane and, in lesser amounts, to the internal membranes. This distribution augments the efficiency of class II antigenic peptide loading by affecting the efficacy of lateral interaction between DM/DO and class II molecules. Sorting of DM/DO and class II molecules to specific localizations within the MIIC represents a novel way of regulating MHC class II Ag presentation.