In this paper we examined the effects of transforming growth factor beta (TGF beta) on the proliferation and differentiation of rabbit tracheal epithelial cells in primary culture. Treatment of these cells with TGF beta inhibits cell proliferation in a time- and dose-dependent manner; concentrations as low as 1 pM are able to inhibit cell growth. Concomitantly, TGF beta causes cells to accumulate in the G0/G1 phase of the cell cycle and a sharp reduction in the ability of the cells to form colonies after subculture at clonal density. These results indicate that TGF beta induces terminal cell division in these cells. The inhibition of cell growth is accompanied by changes in cell morphology and a stimulation of the formation of cross-linked envelopes. TGF beta enhances the levels of transglutaminase activity and cholesterol sulfate, two markers of squamous differentiation. Our results indicate that TGF beta induces terminal squamous cell differentiation in rabbit tracheal epithelial cells. Retinoic acid (RA) does not affect the commitment to terminal cell division induced by TGF beta, but inhibits the expression of the squamous phenotype. Growth of normal human bronchial epithelial cells was affected by TGF beta in a way similar to that of rabbit tracheal epithelial cells. Several carcinoma cell lines tested were quite resistant to TGF beta, whereas growth of one carcinoma cell line was stimulated by TGF beta. These results indicate that a modified response to TGF beta could be one mechanism involved in the aberrant growth control of malignant cells.