Interferon gamma (IFN-gamma) is a potent inducer of squamous differentiation in normal human epidermal keratinocytes. This induction is characterized by a > or = 95% decrease in the mRNA level of two growth regulatory genes, cdc2 and E2F-1, and a 7-15-fold increase in the expression of two squamous cell-specific genes, transglutaminase type I and cornifin. In contrast to the decrease in cdc2 and E2F-1 expression, the increase in transglutaminase type I and cornifin mRNAs by IFN-gamma occurs after a lagtime of more than 12 h. These results are consistent with the hypothesis that in normal human epidermal keratinocyte cells irreversible growth arrest precedes the expression of the squamous-differentiated phenotype. The action of IFN-gamma on the expression of squamous cell-specific genes is antagonized by retinoic acid and transforming growth factor beta 1. Both factors are potent suppressors of the induction of transglutaminase type I and cornifin; however, they do not prevent the commitment to irreversible growth arrest. Several squamous cell carcinoma cell lines do not show a detectable decrease in cdc2 or increase in transglutaminase type I mRNA levels after IFN-gamma treatment and appear to be altered in their control of squamous differentiation.