Tazarotene-induced protein 3 (TIG3) is a recently discovered regulatory protein that is expressed in the suprabasal epidermis. In the present study, we show that TIG3 regulates keratinocyte viability and proliferation. TIG3-dependent reduction in keratinocyte viability is accompanied by a substantial increase in the number of sub-G1 cells, nuclear shrinkage, and increased formation of cornified envelope-like structures. TIG3 localizes to the membrane fraction, and TIG3-dependent differentiation is associated with increased type I transglutaminase activity. Microscopic localization and isopeptide cross-linking studies suggest that TIG3 and type I transglutaminase co-localize in membranes. Markers of apoptosis, including caspases and poly(ADP-ribose) polymerase, are not activated by TIG3, and caspase inhibitors do not stop the TIG3-dependent reduction in cell viability. Truncation of the carboxyl-terminal membrane-anchoring domain results in a complete loss of TIG3 activity. The morphology of the TIG3-positive cells and the effects on cornified envelope formation suggest that TIG3 is an activator of terminal keratinocyte differentiation. Our studies suggest that TIG3 facilitates the terminal stages in keratinocyte differentiation via activation of type I transglutaminase.