IFN consensus sequence binding protein (ICSBP; IFN regulatory factor-8) is a transcription factor of the IFN regulatory factor family. Disruption of this gene results in a leukemia-like disease in mice. To investigate the role of ICSBP in myeloid cell development, lineage marker-negative (Lin−) bone marrow progenitor cells were purified from ICSBP+/+ and ICSBP−/− mice and tested for gene expression and colony-forming ability. ICSBP was expressed in Lin− progenitor cells, and its levels were markedly increased by IFN-γ. The colony-forming potential of ICSBP−/− progenitor cells was grossly abnormal, as they gave rise to a disproportionately high number of granulocyte colonies and many fewer macrophage colonies. IFN-γ inhibited colony formation, while promoting macrophage maturation in ICSBP+/+ cells. In contrast, the effects of IFN-γ were completely absent in ICSBP−/− progenitors. By retrovirus transduction we tested whether reintroduction of ICSBP restores a normal colony-forming potential in−/− progenitor cells. The wild-type ICSBP, but not transcriptionally defective mutants, corrected abnormal colony formation by increasing macrophage colonies and decreasing granulocyte colonies. Taken together, ICSBP plays a critical role in myeloid cell development by controlling lineage selection and is indispensable for IFN-γ-dependent modulation of progenitor cell maturation.