Cytotrophoblast cells of the first trimester placenta are highly invasive when removed from villi and cultured in vitro. In vivo, however, only selected cytotrophoblast cells break through the overlying syncytiotrophoblast to form cytotrophoblast columns and ultimately invade the endometrium. To explore the role of paracrine growth factors in regulating cytotrophoblast development, we cultured explants of first trimester chorionic villi in vitro. Both activin and inhibin, as well as the activin binding protein follistatin, are produced by various trophoblast cells throughout pregnancy. We found that addition of activin-A, but not inhibin-A, stimulated the outgrowth of cytotrophoblast cells into the surrounding matrix. This outgrowth was characteristic of that observed in extravillous cytotrophoblast cells in vivo; it was accompanied by cell division within the proximal region of the cytotrophoblast outgrowth, synthesis of fibronectin, as well as the expression of markers characteristic of invasive cytotrophoblast cells, human leukocyte antigen-G and matrix metalloproteinase (MMP)-9. Activin also specifically induced the early expression of MMP-2 within villous cytotrophoblast cells. Addition of the activin binding protein, follistatin, blocked all of the effects of exogenous activin. The morphological and biochemical effects of activin were similar to those observed when signaling of endogenous transforming growth factor-β was blocked. Interestingly, the latter effects were also reversed by the addition of follistatin. These data suggest that activin plays a local role in promoting cytotrophoblast column formation, likely by regulating the differentiation of villous cytotrophoblast into extravillous cytotrophoblast cells.