To define a mechanism by which retinoblastoma protein (Rb) functions in cellular differentiation, we studied primary fibroblasts from the lung buds of wild-type (RB+/+) and null-mutant (RB-/-) mouse embryos. In culture, the RB+/+ fibroblasts differentiated into fat-storing cells, either spontaneously or in response to hormonal induction; otherwise syngenic RB-/- fibroblasts cultured in identical conditions did not. Ectopic expression of normal Rb, but not Rb with a single point mutation, enabled RB-/- fibroblasts to differentiate into adipocytes. Rb appears in murine fibroblasts to activate CCAAT/enhancer-binding proteins (C/EBPs), a family of transcription factors crucial for adipocyte differentiation. Physical interaction between Rb and C/EBPs was demonstrated by reciprocal coimmunoprecipitation, but occurred only in differentiating cells. Wild-type Rb also enhanced the binding of C/EBP to cognate DNA sequences in vitro and the transactivation of a C/EBPbeta-responsive promoter in cells. Taken together, these observations establish a direct and positive role for Rb in terminal differentiation. Such a role contrasts with the function of Rb in arresting cell cycle progression in G1 by negative regulation of other transcription factors like E2F-1.