There is significant interest in the potential use of telomerase-immortalized cells in transplantation to replace neurons lost to neurodegenerative diseases and other central nervous system injuries. Neural progenitor cells (NPCs) transduced with human telomerase reverse transcriptase (hTERT), the catalytic component of telomerase, have the potential both to proliferate indefinitely in vitro and to respond to differentiation signals necessary for generating appropriate cells for transplantation. The purpose of this study was to evaluate the differentiation of neurons from NT2 cells, a model NPC cell line, following hTERT transduction. RT-PCR and telomerase activity data demonstrated that persistent exogenous hTERT expression significantly inhibited the differentiation of neurons from NT2 cells. Following retinoic acid induced differentiation, hTERT-NT2 cells produced only one fourth of the neurons generated by parental and vector-control cells. A differentiation-inhibiting effect of constitutive telomerase activity has not been reported previously in other hTERT-transduced progenitor cell lines, implying a unique role for telomerase in the proliferation and differentiation of NPCs that have tumorigenic potential. Elucidating the mechanism responsible for this effect may aid in understanding the potential role of telomerase activity in the tumorigenicity of NPCs, as well as in optimizing the production of safe, telomerase-engineered, transplantable neurons.