A study of young children's assignment of nouns to gender categories and general mastery of the Icelandic gender system is reported. An examination of what is involved in the induction of formal categories such as gender introduces the proposal of a "principle of localness." This principle states that the closer in proximity a closed class item is to an open class item, the more likely the closed class item will be chosen as a predictor of the categorical status of the open class item. The Icelandic gender system is briefly described, and studies of early rudimentary use of the three-way gender system are used to predict subsequent acquisition. Several experiments are reported that support the hypothesis of localness: one introduces novel nouns to three-year-olds, one is a case study of a two-year-old girl's conversation, and the third is a study of gender assignment to new nouns in 144 Icelandic children aged three, four, five, and six years. In the last study it was found that children made more accurate neuter assignments for introduced monosyllabic nouns, and more accurate masculine and feminine assignments for bisyllabic nouns. The effects of the relative localness of cues in this study are examined further. (MSE)