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Treatment of F9 teratocarcinoma stem cells with retinoic acid (RA) causes their irreversible differentiation into extraembryonic endoderm. To elucidate the role of the cellular retinoic acid binding protein-I (CRABP-I) in this differentiation process, we have generated several different stably transfected F9 stem cell lines expressing either elevated or reduced levels of functional CRABP-I protein. Stably transfected lines expressing elevated levels of CRABP-I exhibit an 80- 90% reduction in the RA induced expression of retinoic acid receptor (RAR) beta, laminin B1, and collagen type IV (alpha 1) mRNAs at low exogenous RA concentrations, but this reduction is eliminated at higher RA concentrations. Thus, greater expression of CRABP-I reduces the potency of RA in this differentiation system. Moreover, transfection of a CRABP-I expression vector into F9 cells resulted in five- and threefold decreases in the activation of the laminin B1 RARE (retinoic acid response element) and the RAR beta RARE, respectively, as measured from RARE/CAT expression vectors in transient transfection assays. These results support the idea that CRABP-I sequesters RA within the cell and thereby prevents RA from acting to regulate differentiation specific gene expression. Our data suggest a mechanism whereby the level of CRABP-I can regulate responsiveness to RA during development.