The par (partitioning-defective) genes express a set of conserved proteins that function in polarization and asymmetric cell division. Par-3 has multiple protein-interaction domains, and associates with Par-6 and atypical protein kinase C (aPKC). In Drosophila, Par-3 is essential for epithelial cell polarization. However, its function in mammals is unclear. Here we show that depletion of Par-3 in mammalian epithelial cells profoundly disrupts tight junction assembly. Expression of a carboxy-terminal fragment plus the third PDZ domain of Par-3 partially rescues junction assembly, but neither Par-6 nor aPKC binding is required. Unexpectedly, Rac is constitutively activated in cells lacking Par-3, and the assembly of tight junctions is efficiently restored by a dominant-negative Rac mutant. The Rac exchange factor Tiam1 (ref. 7) binds directly to the carboxy-terminal region of Par-3, and knockdown of Tiam1 enhances tight junction formation in cells lacking Par-3. These results define a critical function for Par-3 in tight junction assembly, and reveal a novel mechanism through which Par-3 engages in the spatial regulation of Rac activity and establishment of epithelial polarity.