This study examined the neural substrates underlying the implementation of phonological rule in lexical tone by the Tone 3 sandhi phenomenon in Mandarin Chinese. Tone 3 sandhi is traditionally described as the substitution of Tone 3 with Tone 2 when followed by another Tone 3 (33 →23) during speech production. Tone 3 sandhi enables the examination of tone processing in the phonological level with the least involvement of segments. Using the fMRI technique, we measured brain activations corresponding to the monosyllable and disyllable sequences of the four Chinese lexical tones, while manipulating the requirement on overt oral response. The application of Tone 3 sandhi to disyllable sequence of Tone 3 was confirmed by our behavioral results. Larger brain responses to overtly produced disyllable Tone 3 (33 > 11, 22, and 44) were found in right posterior IFG by both whole-brain and ROI analyses. We suggest that the right IFG was responsible for the processing of Tone 3 sandhi. Intense temporo-frontal interaction is needed in speech production for self-monitoring. The involvement of the right IFG in tone production might result from its interaction with the right auditory cortex, which is known to specialize in pitch. Future studies using tools with better temporal resolutions are needed to illuminate the dynamic interaction between the right inferior frontal regions and the left-lateralized language network in tone languages.