The peptide hormone glucagon stimulates hepatic glucose output, and its levels in the blood are elevated in type 2 diabetes mellitus. The nuclear receptor peroxisome proliferator-activated receptor-gamma (PPARgamma) has essential roles in glucose homeostasis, and thiazolidinedione PPARgamma agonists are clinically important antidiabetic drugs. As part of their antidiabetic effect, thiazolidinediones such as rosiglitazone have been shown to inhibit glucagon gene transcription through binding to PPARgamma and inhibition of the transcriptional activity of PAX6 that is required for cell-specific activation of the glucagon gene. However, how thiazolidinediones and PPARgamma inhibit PAX6 activity at the glucagon promoter remained unknown. After transient transfection of a glucagon promoter-reporter fusion gene into a glucagon-producing pancreatic islet alpha-cell line, ligand-bound PPARgamma was found in the present study to inhibit glucagon gene transcription also after deletion of its DNA-binding domain. Like PPARgamma ligands, also retinoid X receptor (RXR) agonists inhibited glucagon gene transcription in a PPARgamma-dependent manner. In glutathione transferase pull-down assays, the ligand-bound PPARgamma-RXR heterodimer bound to the transactivation domain of PAX6. This interaction depended on the presence of the ligand and RXR, but it was independent of the PPARgamma DNA-binding domain. Chromatin immunoprecipitation experiments showed that PPARgamma is recruited to the PAX6-binding proximal glucagon promoter. Taken together, the results of the present study support a model in which a ligand-bound PPARgamma-RXR heterodimer physically interacts with promoter-bound PAX6 to inhibit glucagon gene transcription. These data define PAX6 as a novel physical target of PPARgamma-RXR.