The cytokine interferon-beta is a regulator of cell replication and function, including invasion and induction of angiogenesis. The goal of this study was to determine whether the expression of interferon-beta by cells in the epidermis correlated with terminal differentiation. In situ hybridization analysis and immunohistochemical staining of formalin-fixed, paraffin-embedded specimens of normal human and murine epidermis and human and murine skin tumors of epithelial origin revealed that only differentiated, nondividing cells of the epidermis expressed interferon-beta protein. Keratinocyte cultures established from the epidermis of 3 d old mice were maintained under conditions permitting continuous cell division or induction of differentiation. Continuously dividing cells did not produce interferon-beta whereas nondividing differentiated cells expressing keratin 1 did. Growth-arrested, undifferentiated keratinocytes also expressed interferon-beta protein. Neutralizing interferon-beta in the culture medium inhibited differentiation, but the addition of exogenous interferon-beta did not stimulate differentiation. These data indicate that interferon-beta is produced by growth-arrested, terminally differentiated keratinocytes.