Tight junctions, the most apical of the intercellular junctions that connect individual cells in a epithelial sheet, are thought to form a seal that restricts paracellular and intramembrane diffusion. To analyze the functioning of tight junctions, we generated stable MDCK strain 2 cell lines expressing either full-length or COOH-terminally truncated chicken occludin, the only known transmembrane component of tight junctions. Confocal immunofluorescence and immunoelectron microscopy demonstrated that mutant occludin was incorporated into tight junctions but, in contrast to full-length chicken occludin, exhibited a discontinuous junctional staining pattern and also disrupted the continuous junctional ring formed by endogenous occludin. This rearrangement of occludin was not paralleled by apparent changes in the junctional morphology as seen by thin section electron microscopy nor apparent discontinuities of the junctional strands observed by freeze-fracture. Nevertheless, expression of both wild-type and mutant occludin induced increased transepithelial electrical resistance (TER). In contrast to TER, particularly the expression of COOH-terminally truncated occludin led to a severalfold increase in paracellular flux of small molecular weight tracers. Since the selectivity for size or different types of cations was unchanged, expression of wild-type and mutant occludin appears to have activated an existing mechanism that allows selective paracellular flux in the presence of electrically sealed tight junctions. Occludin is also involved in the formation of the apical/basolateral intramembrane diffusion barrier, since expression of the COOH-terminally truncated occludin was found to render MDCK cells incapable of maintaining a fluorescent lipid in a specifically labeled cell surface domain.