We show, in this study, that type I IFN induction of the cyclin-dependent kinase (cdk) inhibitor p21WAF1 in the human Burkitt lymphoma B cell-line Daudi and ensuing cell cycle arrest correlate with the terminal differentiation of these cells, and is ultimately followed by apoptosis and cell death. The expression of p21WAF1 paralleled the onset of G1 arrest and the reduction of surface IgM expression which was used as a marker of the differentiation response, and the IFN treated cells acquired a typical plasma cell-like morphology. The type II IFN IFNgamma, which does not inhibit the growth of Daudi cells, did not induce the expression of p21WAF1, nor affect the expression of surface IgM. The induction of p21WAF1 which paralleled the inhibition of the phosphorylation of the retinoblastoma protein, pRB, was preceded by the strong reduction in c-myc levels. We propose that the coupled down-regulation of c-myc and induction of p21WAF1 may be crucial to the induction of differentiation and G1 arrest in Daudi cells by type I IFN. Growth arrest and differentiation was followed by apoptosis and cell death, and was accompanied by the induction of the activity of the apoptotic ICE-family protease CPP32. G1 arrest and differentiation followed by apoptotic cell death are characteristics of terminal differentiation. Thus, our data suggest that the induction of p21WAF1 and G1 arrest mediated by type I IFN in Daudi cells is part of terminal differentiation response in these cells, highlighting a role for type I IFN as B cell terminal differentiation factors.