Calcium functions as a trigger for the switch between epithelial cell growth and differentiation. We report here that the calcium/calmodulin-dependent phosphatase calcineurin is involved in this process. Treatment of primary mouse keratinocytes with cyclosporin A, an inhibitor of calcineurin activity, suppresses the expression of terminal differentiation markers and of p21(WAF1/Cip1) and p27(KIP1), two cyclin-dependent kinase inhibitors that are usually induced with differentiation. In parallel with down-modulation of the endogenous genes, suppression of calcineurin function blocks induction of the promoters for the p21(WAF1/Cip1) and loricrin differentiation marker genes, whereas activity of these promoters is enhanced by calcineurin overexpression. The calcineurin- responsive region of the p21 promoter maps to a 78-bp Sp1/Sp3-binding sequence next to the TATA box, and calcineurin induces activity of the p21 promoter through Sp1/Sp3-dependent transcription. We find that the endogenous NFAT-1 and -2 transcription factors, major downstream targets of calcineurin, associate with Sp1 in keratinocytes in a calcineurin-dependent manner, and calcineurin up-regulates Sp1/Sp3-dependent transcription and p21 promoter activity in synergism with NFAT1/2. Thus, our study reveals an important role for calcineurin in control of keratinocyte differentiation and p21 expression, and points to a so-far-unsuspected interconnection among this phosphatase, NFATs, and Sp1/Sp3-dependent transcription.