Differentiation of the specialized epithelial cells of the placenta, termed cytotrophoblasts, is a particularly important aspect of placental development during the first trimester of pregnancy. During this process cytotrophoblast stem cells either fuse to form the syncytium or aggregate to form cell columns that adhere to, then invade the uterus. We found that chorionic villi from early gestation placentas of mothers who smoke showed a marked reduction in cell columns, a defect that could not be corrected by placing them in culture. We used two different in vitro models to determine if nicotine plays a role in the etiology of this defect. Exposing early gestation chorionic villi from nonsmoking women to nicotine inhibited subsequent cell column formation in vitro. Nicotine also inhibited normal first trimester cytotrophoblast invasion, apparently by reducing the ability of treated cells to synthesize and activate the 92 kDa type IV collagenase, an important mediator of invasion in vitro. These results suggest that maternal cigarette smoking inhibits the trophoblast differentiation pathway that leads to column formation and uterine invasion. This effect, which is due at least in part to the effects of nicotine, may contribute to the growth retardation observed in fetuses of mothers who smoke during pregnancy.