Conditioned medium from phytohemagglutinin-stimulated human leukocytes contains a factor that can induce promyelocytic cell lines and certain acute myelogenous leukemia cells to differentiate along the monocytic pathway. In this report, we show that immature myeloid cells from normal bone marrow or the peripheral blood of patients with chronic myelogenous leukemia can be induced to differentiate to monocyte-like cells by immune gamma interferon (IFN gamma). We have identified IFN gamma as the predominant differentiation factor contained in the conditioned medium. Purified or recombinant IFN gamma, but not various preparations of IFN alpha or beta, can induce monocytic differentiation in myeloid cells. In cultures containing conditioned medium, the cells fail to continue myeloid maturation, and are induced to express monocyte markers and functions, such as monocyte-specific surface antigens, HLA-DR antigens, Fc receptors for monomeric immunoglobulins, nonspecific esterase, and the ability to mediate antibody-dependent, cell-mediated cytotoxicity. Even myeloid cells as mature as metamyelocytes or band cells can be induced by IFN gamma to undergo monocyte differentiation, but monocyte-specific or HLA-DR antigens are not induced in mature neutrophils. These findings reveal a previously unknown, specific function of human IFN gamma and offer new insights to the regulation of monocyte recruitment and differentiation during a virus infection or immune response.