Epstein-Barr virus (EBV), a human herpesvirus, is strongly linked with two relatively rare forms of B-cell lymphoma and with a much more prevalent epithelial malignancy, undifferentiated nasopharyngeal carcinoma (NPC). The availability of suitable culture systems has allowed detailed analysis of EBV-induced growth transformation in B lymphocytes, but little is known about the virus--epithelial cell interaction or about the possible effector role of viral proteins in the pathogenesis of NPC. Here we describe an experimental system to monitor the effects of introduced viral or cellular genes upon human epithelial cell growth and differentiation. We transfected a human epithelial cell line, which retains several features of normal keratinocyte behaviour in vitro, with the EBV gene encoding latent membrane protein (LMP), one of only two viral proteins known to be expressed in NPC cells in vivo. LMP expression was accompanied by changes in the epithelial cell surface phenotype, mimicking surface changes observed in NPC cells, and by severe impairment of the cellular response to differentiation signals. The ability of LMP to inhibit terminal differentiation indicates a mechanism whereby EBV infection of squamous epithelium could contribute to the multi-step pathogenesis of NPC.