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In the epidermis of skin, a fine balance exists between proliferating progenitor cells and terminally differentiating cells. We examined the effects of TGF-beta s and retinoic acid (RA) on controlling this balance in normal and malignant human epidermal keratinocytes cultured under conditions where most morphological and biochemical features of epidermis in vivo are retained. Our results revealed marked and pleiotropic effects of both TGF-beta and RA on keratinocytes. In contrast to retinoids, TGF-beta s acted on mitotically active basal cells to retard cell proliferation. Although withdrawal from the cell cycle is a necessary prerequisite for commitment to terminal differentiation, TGF-beta s inhibited normal keratinization in suprabasal cells and promoted the type of differentiation commonly associated with wound-healing and epidermal hyperproliferation. The actions of TGF-beta s and RA on normal keratinization were synergistic, whereas those on abnormal differentiation associated with hyperproliferation were antagonistic. These observations underscore the notion that environmental changes can act separately on proliferating and differentiating cells within the population. Under the conditions used here, the action of TGF-beta s on human keratinocytes was dominant over RA, and TGF-beta s did not seem to be induced as a consequence of RA treatment. This finding is consistent with the fact that RA accelerated, rather than inhibited, proliferation in raft cultures. Collectively, our data suggest that the effects of both factors on epidermal growth and differentiation are multifaceted and the extent to which their action is coupled in keratinocytes may vary under different conditions and/or in different species.