Ligands and activators of the nuclear hormone receptor superfamily are important in the regulation of epidermal development and differentiation. Previously, we showed that naturally occurring fatty acids, as well as synthetic ligands for the peroxisome proliferator-activated receptor, induce keratinocyte differentiation in vitro. Here we asked whether oxysterols, another class of lipids formed de novo in the epidermis and that activate liver X-activated receptor, regulate keratinocyte differentiation. mRNA and protein levels of involucrin and transglutaminase 1, markers of differentiation, increased 2- to 3-fold in normal human keratinocytes incubated in the presence of 25- or 22R-hydroxycholesterol in low calcium. In high calcium, which alone induces differentiation, mRNA levels were further increased by oxysterols. Rates of cornified envelope formation, an indicator of terminal differentiation, also increased 2-fold with oxysterol treatment. In contrast, the rate of DNA synthesis was inhibited approximately 50% by oxysterols. Transcriptional regulation was assessed in keratinocytes transfected with either transglutaminase 1 or involucrin promoter-luciferase constructs. 22R-hydroxycholesterol increased transglutaminase 1 and involucrin promoter activity 2- to 3-fold. Either deletion of the -2452 bp to -1880 bp region of the involucrin promoter, or mutation of the AP-1 site within this region, abolished oxysterol responsiveness. Moreover, increased AP-1 DNA binding was observed in oxysterol-treated keratinocytes by gel shift analyses. Finally, we demonstrated the presence of liver X-activated receptor alpha and beta mRNAs, and showed that oxysterols stimulate a liver X-activated receptor response element transfected into keratinocytes. These data suggest that oxysterols induce keratinocyte differentiation, in part through increased AP-1-dependent transcription of the involucrin gene, an effect that may be mediated by liver X-activated receptor.