Upon viral infection, the major defense mounted by the host immune system is the activation of the interferon (IFN)-mediated antiviral pathway. In order to complete their life cycle, viruses that are obligatory intracellular parasites must modulate the host IFN-mediated immune response. Murine gammaherpesvirus 68 (gammaHV68) infects a wide range of cell types and establishes latent infections in mice. Here we demonstrate that the gammaHV68 latency-associated M2 protein has a cell-type-dependent localization pattern: M2 is present in the cytoplasm and plasma membrane in lymphocytes, whereas it is present primarily in the nucleus in epithelial and fibroblast cells. A mutational analysis indicated that the internal positively charged amino acids of M2 are required for its nuclear localization in fibroblasts. Purification of the M2 complex showed that M2 specifically interacts with the cellular p32 acidic protein through its central positively charged region and that this interaction recruits the cellular p32 protein to the nucleus in fibroblasts. Regardless of its localization, M2 expression effectively induced the downregulation of STAT1 and/or STAT2 in both A20 B lymphocytes and NIH 3T3 fibroblasts, resulting in the inhibition of IFN-alpha/beta- and IFN-gamma-mediated transcriptional activation. Finally, the M2 interaction with the p32 protein appeared to contribute to its ability to inhibit IFN-mediated transcriptional activation. These results indicate that gammaHV68 harbors a latency-associated M2 gene that antagonizes IFN-mediated host innate immunity and thus could play an important role in the establishment and maintenance of viral latency in infected animals.