During development of the central nervous system, oligodendrocyte progenitor cells (O-2A) undergo an orderly pattern of cell proliferation and differentiation, culminating in the ability of oligodendrocytes to myelinate axons. Here we report that p27(Kip1), a cyclin-dependent kinase inhibitor, is an important component of the decision of O-2A cells to withdraw from the cell cycle. In vitro, accumulation of p27 correlates with differentiation of oligodendrocytes. Furthermore, only a fraction of O-2A cells derived from p27-knockout mice differentiate successfully compared to controls. Inability to differentiate correlates with continued proliferation, suggesting that p27 is an important component of the machinery required for the G1/G0 transition in O-2A cells. In vivo, expansion of O-2A precursors before withdrawal, in part, leads to a greater number of oligodendrocytes. Together these data indicate a role for p27 during the decision to withdraw from the cell cycle in the oligodendrocyte lineage.