Cell morphogenesis requires dynamic reorganization of the actin cytoskeleton, a process that is tightly regulated by the Rho family of small GTPases. These GTPases act as molecular switches by shuttling between their inactive GDP-bound and active GTP-bound forms. Here we show that Nir2, a novel protein related to Drosophila retinal degeneration B (RdgB), markedly affects cell morphology through a novel Rho-inhibitory domain (Rid) which resides in its N-terminal region. Rid exhibits sequence homology with the Rho-binding site of formin-homology (FH) proteins and leads to an apparent loss of F-actin staining when ectopically expressed in mammalian cells. We also show that Rid inhibits Rho-mediated stress fiber formation and lysophosphatidic acid-induced RhoA activation. Biochemical studies demonstrated that Nir2, via Rid, preferentially binds to the inactive GDP-bound form of the small GTPase Rho. Microinjection of antibodies against Nir2 into neuronal cells markedly attenuates neurite extension, whereas overexpression of Nir2 in these cells attenuates Rho-mediated neurite retraction. These results implicate Nir2 as a novel regulator of the small GTPase Rho in actin cytoskeleton reorganization and cell morphogenesis.