We characterized truncations of the human vasopressin V2 receptor to determine the role of the intracellular C-terminus (comprising about 44 amino acids) in receptor function and cell surface expression. In contrast to the wild-type receptor, the naturally occurring mutant R337X failed to confer specific [3H]AVP binding to transfected cells. In addition, no vasopressin-sensitive adenylyl cyclase was detectable in membrane preparations of these cells. Laser scanning microscopy revealed that c-myc epitope- or green fluorescent protein-tagged R337X mutant receptors were retained within the endoplasmic reticulum. Increasing the number of C-terminal residues (truncations after codons 348, 354 and 356) restored G protein coupling, but revealed a length-dependent reduction of cell surface expression. Replacement of positively charged residues within the C-terminus by glutamine residues also decreased cell surface expression. A chimeric V2 receptor with the C-terminus replaced by that of the beta2-adrenergic receptor did not bind [3H]AVP and was retained within the cell. These data suggest that residues in the N-terminal part of the C-terminus are necessary for correct folding and that C-terminal residues are important for efficient cell surface expression.