The biochemical signaling mechanisms involved in transducing the effects of tumor necrosis factor alpha (TNF alpha) and gamma-interferon (gamma-IFN) on leukemia cell differentiation are poorly defined. Recent studies established the existence of a sphingomyelin cycle that operates in response to the action of vitamin D3 on HL-60 cells and that may transduce the effects of vitamin D3 on cell differentiation (Okazaki, T., Bell, R., and Hannun, Y. (1989) J. Biol. Chem. 264, 19076-19080). The effects of TNF alpha and gamma-IFN on sphingomyelin turnover were determined, and the specificity and role of sphingomyelin hydrolysis in HL-60 human promyelocytic leukemia cells with 20% hydrolysis of sphingomyelin at 15 min, 40% hydrolysis at 30-60 min, and return to base line at 2 h. The hydrolyzed sphingomyelin (18 pmol/nmol total phospholipid) was accompanied by the concomitant generation of ceramide (11.2 pmol/nmol total phospholipid). gamma-IFN also caused reversible hydrolysis of sphingomyelin with onset at 1 h and peak effect at 2 h. This sphingomyelin cycle appeared to be specific to the monocytic pathway of HL-60 differentiation, since it was not activated by retinoic acid or dibutyryl cAMP, inducers of granulocytic differentiation, nor with phorbol myristate acetate, an inducer of macrophage-like differentiation. Addition of synthetic ceramide or bacterial sphingomyelinase induced monocytic differentiation of HL-60 cells. Cell-permeable ceramide also caused prompt down-regulation of mRNA for the c-myc protooncogene. The time course of c-myc down-regulation was consistent with the action of ceramide as the mediator of TNF alpha action. These results suggest that sphingomyelin turnover may be an important signaling mechanism transducing the actions of TNF alpha and gamma-IFN with specific function in cell differentiation.