We used a series of cell clones from a human teratocarcinoma cell line, PA-1, to study the effect of transformation by an activated N-ras oncogene on the expression of genes involved in retinoic acid (RA)-induced differentiation and growth regulation. Recently, it has been shown that expression of human HOX 2 genes is sequentially activated by RA beginning from Hox 2.9 at the 3' end of the HOX 2 cluster (A. Simeone, D. Acampora, L. Arcioni, P. W. Andrews, E. Boncinelli, and F. Mavilio, Nature [London] 346:763-766, 1990). We now report that six different genes of the cluster HOX 1 are sequentially induced by RA in a similar temporal pattern, beginning with genes at the 3' end of the cluster. However, in N-ras-transformed cell clones, RA-induced expression of these homeobox genes is delayed. Hox 1.4 and Hox 1.3, genes abundantly induced in nontransformed clones after 3 days of RA treatment, are expressed in N-ras-transformed cells only after 10 days of RA treatment. At this time, the cells' growth is arrested at very high density, and no differentiated morphologic characteristics are observed. Constitutive expression of a transfected Hox 1.4 gene under the control of a simian virus 40 promotor leads to differentiated cell morphology similar to that of the RA-induced phenotype and restores the growth-inhibitory effects of RA in N-ras-transformed cells. These observations provide evidence that enhanced proliferation in N-ras-transformed cells compromises teratocarcinoma cell differentiation by a mechanism that transiently suppresses homeobox gene induction and implies a central role for homeobox genes in RA-induced cell differentiation. We conclude that stimulation of a putative growth factor signal pathway, associated with ras-induced proliferation, transiently suppresses the induction of transcription factors functionally involved in cell growth and differentiation.