Histone deacetylases (HDACs) modulate chromatin structure and transcription, but little is known about their function in mammalian development. HDAC1 was implicated previously in the repression of genes required for cell proliferation and differentiation. Here we show that targeted disruption of both HDAC1 alleles results in embryonic lethality before E10.5 due to severe proliferation defects and retardation in development. HDAC1-deficient embryonic stem cells show reduced proliferation rates, which correlate with decreased cyclin-associated kinase activities and elevated levels of the cyclin-dependent kinase inhibitors p21(WAF1/CIP1) and p27(KIP1). Similarly, expression of p21 and p27 is up-regulated in HDAC1-null embryos. In addition, loss of HDAC1 leads to significantly reduced overall deacetylase activity, hyperacetylation of a subset of histones H3 and H4 and concomitant changes in other histone modifications. The expression of HDAC2 and HDAC3 is induced in HDAC1-deficient cells, but cannot compensate for loss of the enzyme, suggesting a unique function for HDAC1. Our study provides the first evidence that a histone deacetylase is essential for unrestricted cell proliferation by repressing the expression of selective cell cycle inhibitors.