To study the mechanism and role of ligand-dependent endocytosis, we have engineered a mutant insulin receptor that retains its insulin binding and insulin-stimulated tyrosine kinase activities but does not exhibit ligand-induced internalization. The mutant has a deletion of the 16th exon which encodes 22 amino acids (residues 944-965) on the cytoplasmic side of the transmembrane region of the receptor beta-subunit. When the cDNA is transfected in Rat 1 cells, the mutant receptor (HIR delta ex16) is processed to a glycosylated alpha 2 beta 2 heterotetramer and expressed at the cell surface. HIR delta ex16 receptors bind insulin with lower affinity than normal receptors (ED50 for insulin competition = 1.1 nM compared with 0.2 nM for normal receptors), but binding is normal in detergent solution. The mutant HIR delta ex16 receptor undergoes insulin-dependent autophosphorylation and activation as a tyrosine kinase toward exogenous substrates in vitro. In vivo, the receptor is also enzymatically active, as assessed 1) by the ability of antiphosphotyrosine antibodies to precipitate equivalent proportions (58-60%) of occupied wild type or mutant receptors and 2) by immunoblotting extracts of insulin-stimulated cells using antiphosphotyrosine antibodies. In the latter experiment, cells expressing HIR delta ex16 receptors exhibit tyrosine phosphorylation of insulin receptor beta-subunits as well as of pp 185, a putative substrate of the receptor. Despite the ability to bind insulin and activate as a tyrosine kinase, HIR delta ex16 receptors do not internalize in Rat 1 cells. Whereas normal surface receptors covalently labeled with the photoaffinity reagent 125I-NAPA-DP insulin are 36% intracellular after 1 h at 37 degrees C, only background levels of internalization are seen when HIR delta ex16 receptors are labeled. The HIR delta ex16 receptors mediate no internalization or degradation of 125I-insulin compared with control untransfected Rat 1 cells, and they do not down-regulate after long exposure to saturating concentrations of insulin. We conclude that the 16th exon encodes a domain necessary for ligand-dependent endocytosis.