Hypoxia-inducible factors (HIFs) regulate more than 200 genes involved in cellular adaptation to reduced oxygen availability. HIFs are heterodimeric transcription factors that consist of one of three HIF-α subunits and a HIF-β subunit. Under normoxic conditions the HIF-α subunit is hydroxylated by members of a family of prolyl-4-hydroxylase domain (PHD) proteins, PHD1, PHD2 and PHD3, resulting in recognition by von-Hippel-Lindau protein, ubiquitylation and proteasomal degradation. It has been suggested that PHD2 is the key regulator of HIF-1α stability in vivo. Previous studies on the intracellular distribution of PHD2 have provided evidence for a predominant cytoplasmic localisation but also nuclear activity of PHD2. Here, we investigated functional nuclear transport signals in PHD2 and identified amino acids 196-205 as having a crucial role in nuclear import, whereas amino acids 6-20 are important for nuclear export. Fluorescence resonance energy transfer (FRET) showed that an interaction between PHD2 and HIF-1α occurs in both the nuclear and cytoplasmic compartments. However, a PHD2 mutant that is restricted to the cytoplasm does not interact with HIF-1α and shows less prolyl hydroxylase activity for its target HIF-1α than wild-type PHD2 located in the nucleus. Here, we present a new model by which PHD2-mediated hydroxylation of HIF-1α predominantly occurs in the cell nucleus and is dependent on very dynamic subcellular trafficking of PHD2.